Buying a home – especially your first home – can be thrilling. It’s easy to get carried away when you see that tantalizing property you really want. Many people convince themselves that it’ll be easy to squeeze that extra few hundred dollars out of their budget each month to “make it happen.” but in the long run, doing so is actually a pretty bad idea.
When you’re going to take out a mortgage, you need to carefully consider how much money you can afford for the monthly payment. It’s one thing to eat Kraft dinner while scrimping and saving to buy that Mercedes you’ve always wanted. It’s another thing to eat it for 25 years because you bit off more than you can chew, for the lifetime of your mortgage.
Lenders keep an eye on this as well, and they tend to use two ratios:
1. One that compares your income to your mortgage expenses and
2. One that compares your total debt payments to your total income
This determines how much you can afford. The amount you can borrow depends on the interest rate of the loan, which is why most lenders base your maximum mortgage on the size of the monthly mortgage expenses – not the size of the entire mortgage.
It’s easy to calculate how much mortgage you can afford & there are tons of Internet tools for this. Here’s a link to our mortgage calculator that you can use, to find out if your pockets run deep enough for the mortgage you want.
If you want to figure it out the “old school” way, then grab some pay stubs and a calculator. This is how you do it:
1. Determine your pre-tax monthly income
2. Multiply your pre-tax monthly income by 0.28. For example, $9,000 of pre-tax income x 0.28 is $2,520
3. Multiply your pre-tax monthly income by 0.36. For example, $9,000 of pre-tax income x 0.36 is $3,240.
4. Subtract any other debt payments that you have to make each month. These can include a lease on a car, or student loans. For example, if you have car payments that are $400 per month you would subtract that from your totals to define the final numbers: $3,240 – $400 is $2,840 per month.
5. The lowest number from steps 2 and 4 is the maximum recommended amount you should spend on your mortgage each month. In this case, $2,520 is the magic number, so long as you don’t have any debt payments.
The task of calculating how much mortgage you can afford is easier than you think. It’s also a necessary step when it comes to your financial planning as a new homeowner. In this case, a little planning goes a long way – in fact it goes as far as a 25-year mortgage lifetime.
When you’re ready to make the leap, the next stage is to sit down with a mortgage broker and complete a pre-approval. This will ensure that your numbers are correct & will give you the confidence to start shopping for your dream home!