Starting the process of buying and securing financing for a new home is an exciting time, but it's important to stay grounded. Some new home buyers make the mistake of overestimating how much home they can afford to buy and take on a payment that's hard to manage. Before you call a mortgage lender, plan and perform some numbers crunching to determine how much your monthly mortgage payment should be.
What Is the Mortgage Payment?
The monthly mortgage payment is made up of both principal (a portion of the amount you borrowed) and interest charges. In many cases you also have to include real estate taxes and homeowners insurance with your payment. In some cases the lender also charges private mortgage insurance premiums as well -- PMI protects the lender if the borrower can't put at least 20 percent down on the home purchase. Keep all these factors in mind when estimating how much of a payment you can afford.
Analyze Your Financial Situation
If you're wondering how much you should pay each month for your mortgage payment, the short answer is what you can afford to fit into your current budget. Before you purchase a house, it's a smart idea to sit down and prepare a monthly budget that lists your and your partner's combined take-home income as well as all expenses. With that information, you can figure out how much money you can afford to pay each month toward your mortgage. A rule of thumb is to use the amount of rent you currently pay on your apartment as a guideline. If that amount fits comfortably into your budget, don't stray too far from it when deciding on the mortgage payment you can afford.
Mortgage lenders decide if you can afford a payment based on a stricter set of rules. Bank rules usually state that the borrower's total monthly payment should be no more than 28 percent (.28 in decimal form) of his gross income each month. The amount of a mortgage payment you can afford is equal to your salary times .28 divided by 12. By this guideline, if you make $35,000 per year (before taxes) you can afford a mortgage payment of $816.67 per month or less, using the formula (35,000 * .28)/12.
Total Debt Payments
The lender may also look at your total debt payments when determining what mortgage payment you can afford. In this case, the lender looks at your ratio of total monthly debt payments (including mortgage, credit card payments, auto loans, student loans and other debt obligations). The ratio typically should be 36 percent or less. In this case the amount of payment you can afford is your gross yearly salary times .36 divided by 12. The result is the maximum amount of debt you can afford to pay, total, each month. If your other debt obligations are very high, they can limit the amount you can afford for a monthly mortgage payment.
Additional Principal Payments
You also have the option to make additional principal payments to your mortgage lender if you wish in some cases. So if your income or your spouse's goes up after you close the loan and you determine that you can afford more of a payment, you can add more each month to pay down the principal more aggressively. Keep in mind, however, that some lenders charge prepayment penalties if you pay more than your monthly payment.