What mortgage can I afford?  Practically all house buyers have asked themselves that question at one time or another.  What are mortgage points, and what down payment must I have? These are others. Here is some advice on arranging a mortgage that you can afford.

What Mortgage Can I Afford – Pretax Income

It is agreed by most lenders that the mortgage you can afford to pay should a maximum of 28% of your gross income (income before tax.)  This affordable sum includes principal repayments, interest and other monthly costs such as home owners insurance and real estate taxes.

For example, if your annual gross income is $64,000, then your monthly payments should be no more than 28% of $64,000 per year = 0.28 x 74,000/12 = $1,727 monthly. If you earn $40,000, that drops to $933/month.

Adjustable Rate Mortgage

Also take into consideration the fact that, with a fixed interest mortgage, you will pay the same every month for the term of the loan – say 30 years. Each year, as your income increases, your mortgage repayment will be less of a percentage of your income.

You could therefore consider an adjustable rate mortgage. With this you pay a lower interest rate to begin with, followed by a higher rate later when you are earning more. This can often enable you to purchase a better property. Rather than pay less to begin with, you pay the same for a more expensive home.

Mortgage Points

If you have some cash to spare when you arrange your mortgage, you can reduce your interest rate by purchasing mortgage points. One point is 1% of the mortgage loan.  Thus, if you borrow $100,000 to buy your home, one point will cost you $1,000. This will reduce your interest rate about 0.25%, or $250 per year.

However, if you used the same $1,000 as an additional down payment, you would save only $40 each year at a 4% mortgage rate. Once you have paid the required down payment, therefore, any extra cash you have available might be best used to buy points rather than as an additional deposit.

This would depend upon the initial interest rate, the amount of your mortgage loan and the repayment period. Purchasing points is not always cost effective, but is worth considering. A mortgage advisor will be able to give you advice based upon your own circumstances. This could be one way to reduce your monthly repayments. You can therefore afford a larger mortgage.

Pay Your Existing Debt

What mortgage can I afford when I still have my credit cards to pay off?  This is a question only you can answer. Much will depend on the spare cash available each month after making payments on other debts.  Credit cards charge up to 4 times more interest than a mortgage loan. It therefore pays to focus on repaying such debts before taking a mortgage.

You can borrow 4 times the dollars with a 3.5% mortgage than with a credit or store card debt at 14%. Let’s say you delay buying real estate for 6 months. What you pay off in credit card interest and repayments would be saving 2 years mortgage interest payments!

So, you are able to raise the down payment required by your mortgage lender. You still have extra cash available that you are considering using to increase that deposit. Use that instead to reduce other debts at higher interest rates. You will then have more available each month to enable you to take a higher mortgage.

These are just two factors that can be used to increase your affordable mortgage. So before you ask “how much mortgage can I afford?” you should first reduce your potential interest payments to a minimum. Interest will form the bulk of your monthly repayment in the early years of your mortgage.