Making a decision to become a homeowner is on the minds of many renters at this very moment. Will we really find an affordable home in a neighborhood that we like? Should we take advantage of the lowest interest rates in 40 years? We're comfortable paying rent at around $1100 per month, but can we really afford our own home at this time?
A quick way to find out what you can afford is to do the following calculation. Take your present monthly rent, say $1100, and think of it as a monthly mortgage payment. Assume that generally $330 of that total would be used to pay property taxes, and fire insurance each month. Thus, your basic loan principle and interest would total $770. Now, take the present prime lending rate, which now hovers at 4.89%, and apply it to the $770, and you end up being able to purchase a home for around $150,000.
Keep in mind, affordability and ultimately how much home you can purchase fluctuates as the days and weeks move on. For instance, if the interest rate moves up to 5% with the above scenario in mind, you are now only able to purchase a home for $149,000. Not too much of a change. However, if the interest rate moves up to 5.5% (as predicted it will rise as the national economy improves) your purchasing power has now dropped to homes priced at $140,000. Thus, the mortgage interest rate you will be charged today will have a huge impact on how much home you'll actually be able to purchase and afford.
How much you can afford also depends upon your debt-to-income ratio. The Federal Housing Administration (FHA) and mortgage companies have developed a set of ratios based upon how much income one makes per month vs. the amount of debt one incurs each month. For instance, FHA allows 21% of your income to be used towards housing costs, and 43% towards housing expenses and other long-term debt. Conventional loans, on the other hand, only allow 28% of monthly income to be used towards housing, and 36% of income to put towards housing expenses plus other indebtedness.
Therefore, if your car and credit card payments, and your new monthly mortgage adds up to more than the percentages listed above, you may not be able to qualify for a mortgage. Some lenders may allow slight exceptions to the above guidelines. However, you most likely will end up paying a higher interest rate and more fees in the end to secure the loan. Speak to a lender to confirm your ability to purchase even before looking at homes. That way the biggest piece of the affordability mystery will be solved. Contact me at (760) 382-1082, and let's converse about how much you can afford in Ridgecrest, California.