You may have saved money for your down payment, checked your credit score and been to several open houses. However, before you make the final commitment to buy real estate, project your total household income and figure out a rough percentage that will go toward your mortgage. This process helps you figure out your debt-to-income ratio so you can manage your home expenses.
Renting Versus Owning
First-time home buyers sometimes make the error of budgeting the same amount of mortgage payment that they pay in rent. Financial expert Suze Orman has a different formula that can help you zero in on your magic number. If you project a mortgage payment will be the same as your rent, you need to add 45 percent to that figure to get an accurate picture of how much more home ownership may cost you every month. This extra percentage accounts for additional expenses of home ownership, such as taxes, insurance and maintenance.
On his website Dave Ramsey.com, the financial expert shares his more conservative figures for managing mortgage debt. He recommends everyone make a down payment of 10 to 20 percent. The remaining mortgage payment should equal 25 percent of your monthly household income, after taxes. He also recommends considering the aggressive payment schedule of a 15-year rather than a 30-year mortgage.
During the housing bubble, some banks let people borrow more money to buy real estate, resulting in some mortgage payments being as much as half of the borrower's monthly income. On the website Free Money Finance, author David Bach advises borrowing less than banks allow, but still advises that people can borrow more than Ramsey estimates. Bach suggests a 28 percent debt to income ratio, which should include the mortgage principal, mortgage interest, all taxes and home insurance.
Creative Payment Strategies
Ramsey suggests several creative ways of paying your mortgage or tricking yourself into paying it off early. He likes a 30-year, fixed-rate mortgage, rather than Bach's recommended 15-year mortgage, but wants people to pay off the mortgage early. Try paying half your total mortgage every two weeks, and you will make extra mortgage payments every year. You may also opt to pay an extra month's mortgage at the end of the calendar year, ultimately trimming down your 30-year mortgage by seven years.
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