A general rule of thumb is your mortgage payment (principal plus interest) should be about 25 percent of your gross monthly income. Real Estate taxes plus insurance will add another 3 to 6 percent. Other monthly living expenses (including food, clothes, auto payments, other loans, charge cards, and utilities) should range between percent to percent of your gross monthly income. The balance of your income goes for taxes (federal, state, and city) and savings.
It's easy to figure an approximate amount for taxes and living expenses. The big question is how to figure out what size mortgage you can afford. Don't forget you'll need at least a 10 percent down payment (and maybe 20 percent) plus closing costs of 2 to 5 percent of your mortgage ---- cash up front.
The basic formula to calculate your monthly payments is:
Mortgage Amount x
Payment from
$1,000
Above
Chart
You have just found a house for $150,000 and you have a $30,000 down payment plus closing costs ($2,400 to $6,000). You have to mortgage $120,000. Can you afford it?
Using the monthly payment formula for a 30-year mortgage at 10 percent interest, you have:
$120,000 x
$8.78 =
a
$1,053.60
$1,000 monthly
payment or
$12,643.20 per year
To figure if this is 25 percent of your gross annual income divide by .25 which equals $50,572.80. You must earn $50,572 to qualify for this mortgage. This is assuming there are no kinks in your credit rating.
If this turns out to be good news and you actually can afford a bigger and more expensive house (room that you don't necessarily need at this time), you should consider a 15-year mortgage at 10 percent.
Using the formula again, your monthly payments on the same mortgage with the same down payment will be $1,290 per month (120x$10.75), but now your annual gross income has to be approximately $61,920 to qualify.
Your next question may be "Why should I pay more per month for a 15-yeazr mortgage?" Examine the interest table.
The interest on your 30-year mortgage will amount to $2,161 x 120 or $259,320, while the interest on your 15-year mortgage is $935 x 120 or $112,200. A difference of a whopping $147,120! Does that answer your question?
Also, something else to consider is that the equity on your house accumulates much faster with a 15-year mortgage. You're now in a more positive position to move into a more expensive house, if you wish.
