What Size Mortgage Loan Can You Afford?

Learning approximately what size mortgage loan you can afford and what your monthly payments might be isn't difficult if you use the following method. Just take a few minutes with a calculator and a pencil. First figure out how much you can afford to pay each month for mortgage principal, interest and property taxes (PIT) by taking your family's total yearly income before deductions, dividing it by 12 and multiplying the result by 30%. For example, if your total family income is $50,000 a year: $50,000/12 = $4,167 $4,167 x 30% = $1,250 Next, divide your expected yearly tax bill by 12 and subtract it from your monthly PIT estimate. For example, if taxes in a neighbourhood you are interested in are roughly $2,500 a year: $2,500/12 = $209 $1,250 - 209 = $1,041 Then divide the result by one of the monthly payment factors from the table below:

Monthly Payment Factors
Interest Rate (%)	15 yrs	20 yrs	25 yr.
5	7.88	6.57	5.82
6	8.40	7.12	6.40
7	8.93	7.69	7.00
8	9.48	8.28	7.63
9	10.05	8.89	8.28
10	10.62	9.52	8.94

(These figures are approximate: your mortgage lender will be able to provide exact figures for the current interest rate.) For example, if mortgage rates are 7 per cent and you decide to pay back the loan over twenty years: $1,041/7.69 = $135.37 Finally, multiply the answer by 1 000 to get the approximate mortgage loan you can afford. Using this method, if your total income if $50,000 a year and you have no major debts, theoretically you can afford a mortgage of: $135.37 x 1000 = $135,370. Be sure to adjust your calculations to take other debts such as loan payments and credit card balances into consideration; ideally, your total debt loan including PIT shouldn't be more than forty per cent of your income. Let's modify the example to take into account existing debts that require $200 in payments every month: $50,000/12 = $4,167 x 30% = $1250 - $200 = $1,050 $2,500/12 = $1050 - $209 = $841 $841/7.69 = $109.36 x 1,000 = $109,360. With a $50,000 annual income and existing monthly payments of $200, you could theoretically afford a $109,360. mortgage. The price range of homes you can afford depends on how much of a down payment you can add to that figure. If you are wondering what operating a home will cost heating, electricity, necessary maintenance and other things - figure on about three per cent of the value of a home(depending on the age and condition of the home)and divide by 12 to get a very rough idea of potential monthly expenses.