How To Calculate Your Best Mortgage Payment
If you’re hoping to buy a home of your own, it’s important to understand all of the costs that come with homeownership.
People who have primarily rented in the past may be surprised to find that homeownership comes with many miscellaneous costs that renters don’t typically have to worry about.
Don’t worry – that doesn’t mean owning a home isn’t the best option for you!
In fact, many financial experts agree that homeownership is one of the best investments you can make in your lifetime.
However, if you’d like to buy a home, it’s critical to understand how mortgage payments work.
You also must be able to break down the interest, taxes, and fees that come with homeownership so that you can fully understand how much of a mortgage payment you can afford.
To calculate your best mortgage payment, start by…
Evaluate Your Finances
Standard financial advice has always said not to spend more than 30% of your gross monthly income on housing.
Of course, there are some variations to this rule.
Many lenders will approve you if you can afford to spend 35% of your gross income on housing.
And still, extra conservative financial advisors recommend that you not spend more than 25%.
While this advice still remains a good rule of thumb, every person’s finances are unique.
Other factors you will need to consider are the amount of debt you have (including student loans) and any other bills you are obligated to pay.
If you aren’t sure which percentage makes sense for you, start by breaking down your current budget and looking at what you actually spend on housing, utilities, and other bills.
This should help you come up with a number that you know you can safely afford to spend on housing in the future.
You can then check and see what percentage of your income this number is.
If it falls between 25% and 35% of your gross income, it may be the perfect time for you to buy a house.
Commit To A Downpayment
Generally, your loan will cost less in the long run if you can make a higher down payment.
To determine what you are able to put down for a home, first, calculate your total savings.
Once you have that number, subtract an emergency fund – an emergency fund that is equivalent to 3 months of expenses is a good starting point.
Now, make sure you factor in moving costs and any potential home renovations.
Once you’ve subtracted out these savings and expenses, you should be left with what you can afford to put down on your house out of pocket.
Something many home buyers forget to do is to calculate closing costs.
While closing costs can vary depending on home value and lender, it’s best to estimate that you will spend up to 5 % of the home purchase price on closing costs. It’s wise to also deduct this amount from your down payment.
Many mortgage lenders require that you put a 5% downpayment on the house you want to buy, although some will go as low as 3%.
However, if you can put down 10-20% of the total purchase price, you will save yourself significant money over the course of your home loan.
If you don’t have money for a downpayment, that doesn’t necessarily mean your home buying dream is off of the table.
Veterans and some first time home buyers may qualify for a zero down payment loan.
There are also some individual lenders that require very low down payments or even none at all.
If you are opting to buy a home with no down payment, make sure you are aware of the total costs and interest rates that will accumulate over the years.
While not having a down payment will save you cash upfront, you need to make sure it’s a wise financial option in the long run.
Calculate Your Total Monthly Housing Budget
It’s important to be aware of not only what your mortgage payment will be, but also what your total monthly housing expenses will add up to.
This includes property taxes, homeowners insurance, and HOA’s if applicable.
To calculate this total cost as a percentage, add your mortgage plus all taxes, insurance, and fees together. Then divide this figure by your gross monthly income.
You will now be able to see the exact percentage of your income that you will be paying for housing.
Leave Yourself A Cushion
Things can go wrong when you own a home, and there’s no landlord to call if an oven breaks down or a pipe bursts.
It’s always wise to leave a cushion for savings and emergencies in your budget, but probably even more so for homeowners.
Try and calculate your budget with 20% delegated for savings. This way you will always be prepared should a home emergency arise.
Do The Math
How to break down your home expenses into a percentage:
Total monthly housing expenses :
Monthly gross income :
$1500 / $4800 = 0.3125
= 31.25 %
While preparing to buy a home (and making sure it’s a wise decision for your budget) can feel daunting at times, owning a home makes a lot of sense for many people in the long run.
Aside from the fact that you get to experience the pride of homeownership, it’s likely that your home will appreciate over the years and help protect you against inflation.
You can also usually deduct your mortgage interest from your tax return each year, and if you’re a first-time homeowner, you can even deduct the property taxes you pay.
These perks alone make homeownership a sound choice.