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When thinking of buying a home this is important to consider

How Much Home CAN You Afford

 

How much house can you afford? Knowing you want to buy a home is one  thing; knowing how much of a mortgage payment you can handle is quite  another. Too often, dreams and reality collide: You're yearning for a  four-bedroom Colonial, but given your income and debt owed to credit  cards and beyond, the best monthly loan payment you can manage is for a  two-bedroom bungalow in a sketchy party of town.

So how do you  pinpoint a house where the monthly mortgage payment is financially  within your reach, and one that won't drive you deep into debt? Allow us  to help you paint your payment profile picture and find that magic  number 


Why your mortgage payment depends on your income and debt

Your  income is only half the picture of what determines the monthly mortgage  payment you can afford. The other half is your debt—meaning the debt  you owe to credit cards, college loans, and other credit sources. Even  if your income is high, having high credit debt means you have less  money to put toward a monthly mortgage.

One way to factor your  income and credit debt into how much mortgage you can afford is to  follow the 28/36 rule, a simple but effective ratio for mortgage  affordability.

The “28" refers to your monthly housing  payment—things such as mortgage, home insurance, and property  taxes—which shouldn't be more than 28% of your gross monthly income  (ideally this payment should be less). This payment is easy to  calculate, because all you need to do is multiply. For example, if your  gross (meaning before taxes are taken out) monthly income is $6,000, you  would multiply that by 28% (or 0.28), which equals $1,680—this is the  maximum amount of your monthly housing payment.

The “36" refers to  your debt-to-income ratio. This ratio compares your debt, or how much  money you owe (to credit cards, colleges, car loans, and—hopefully  soon—a home loan) to your income. This ratio should be “no more than  36%,

Think  about this ratio in terms of your monthly expenses: If you have a  monthly income of $6,000 but also spend $500 paying off credit cards or  other debt, you would divide $500 by $6,000 to get a debt-to-income  ratio of 8.3%. This ratio is great, but adding $1,680 in monthly  mortgage payments would push up your debt load to $2,180 and your  debt-to-income ratio to 36%. This ratio is exactly the maximum  experts say you can afford. Going past this threshold is a risky move.  Ignore this ratio, and you could end up with a house that, over time,  could drive you even deeper into debt.

How a down payment fits into the picture

Last  but not least, the amount you have for a down payment matters, too.  Ideally, to get the best mortgage rates and terms, you'll want a down  payment amounting to 20% of the price of the house. But if you don't  have that much, rest assured you can put down less. FHA loans, for  instance, need a down payment of only 3.5%.

Once you know both the  down payment you plan to contribute as well as your monthly income and  debt, you can easily work out the maximum monthly mortgage payment you  can afford—and by extension, the priciest house you should buy.

Plug in your own  numbers and see what happens! For this and many more reasons you should see a professional real estate agent. An agent can direct you in all matters concerning your next successful transaction. Call me Patti Alonzo and set up an appointment  and get more information on all your Real Estate needs.

Patti Alonzo is a Licensed Real estate Agent in Winter Park Florida with Re/max200

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Patti Alonzo Realtor Agent Associate at Re/Max200

954 S Orlando Avenue, Winter Park, Florida 32789, United States

office: 407-629-6330

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