Mortgage Guide

There are many types of different loans, and even more personal finance situations. So what is a mortgage and it’s mortgage rate? Here is our complete guide to begin your journey into the successful homeowner’s world.

Mortgage Loan Guideline

How Much of A Mortgage Can I Qualify For?

A mortgage loan amount is based on the following considerations:

  • Down payment or the amount, you can initially pay in cash.  How much is required for the down payment on a house varies according to the other factors listed here.
  • Your credit rating.   A higher credit score presents less risk to the lender so a smaller deposit may be required.  A poor credit score may require a larger deposit.
  • Proof of consistent income.  The lender wants to ensure you have enough regular income to be able to make the monthly payments.
  • Debt to income ratio.  The ratio of your total liabilities to total income will be analyzed.  The more liabilities, the less favorable the borrowing situation. 

Example:

What mortgage can I afford with 100k salary?

  • Take your household income and multiply it by 4. So a $100,000 income can roughly afford a $400,000 house.
  • You can guestimate your monthly payment will go up about $600 for every $100,000 the house is valued at.
  • To get a more exact estimate, property taxes, homeowners insurance, and the average value in the area will have to be calculated in. By using your zip code to find the average cost in the area of interest, you can get exact numbers calculated online and through your lender.

How About Purchasing Mortgage Insurance?

Generally, one is better off purchasing their own mortgage insurance privately, as it is almost always cheaper to purchase mortgage insurance through some other institution rather than your bank at the time of the mortgage. The savings can often be more than $100 per month.

What Are The Different Types of Mortgage Loan And How do They Affect Interest Rates?

Mortgage loans can have interest rates that are either locked in at the time of signing the mortgage papers, or have a variable mortgage rate, which means rates and hence interest repayments are subject to change at any time due to wider economic factors. 

The benefit of having a fixed interest mortgage is in knowing exactly how much interest you will be paying each month, and to avoid an interest rate rise due to international, national or other economic factors that are beyond your control. 

The benefits of having a variable mortgage rate lie in being able to take advantage of current economic situations which lead to interest rate cuts. The nature of a loan with a variable interest rate means rates may rise or fall and hence your interest payments rise or fall as well. 

This is a less certain situation for you to budget for loan repayments, however, you may consider there is a possibility of paying less interest than on a fixed rate. 

How Much of My Income Should I Spend on Mortgage Loans?

Mortgage defaults are all too common, even with the calculations done by lenders. Making sure you don’t fall into that category should be your top priority, even before finding your “perfect home” or a great “investment property”.

Here are some budgeting techniques to help you lay out a feasible mortgage plan based on your household income.

Do You Know the 50/30/20 Rule?

Also known as the 50/20/30 Rule, this popular personal budget recommends:

  • Spending 50% of your income on necessities like a mortgage.
  • Spending no more than 30% on wants.
  • Spending 20% on savings and debt repayment.

The simplicity of this plan enables debt control while still giving your family occasional indulgences and spending.

Your needs should be covered by 50% of your income after tax deduction. These needs are your mortgage payments and other living essentials like utilities, transportation, and groceries.

When a mortgage is added, remember to add your new home insurance and property taxes to this 50%. Americans on average pay around $1,000 insuring their homes, and about $2,000 on property taxes per year. If you are passing the 50% mark, you may have to revisit your wants.

30% of your income should cater to your wants, which are sometimes difficult to differentiate from your needs. Wants include shopping or eating out, travel and entertainment, or discretionary non-essentials.  Unlike needs, wants can be cut back or cut out if the money is needed for more important fixed expenses. 

While 20% of your savings should ideally be put away for unexpected events, you may start with $500 to cover small emergencies and work your way up to a couple months’ worth of savings.

This is also a good budgeting technique to work on getting rid of any debt, such as high-interest credit cards.

Having an emergency fund allows you to pay for the emergency as well as continue regular payments.  Without the emergency fund, your regular payments could be missed, resulting in a lower credit score and more difficulty and expense borrowing.

This 20% also goes towards saving for retirement. Buying a home and therefore paying a mortgage seems like an investment in your future and saving money, but keep in mind this 20% should not cover any house payments or basic necessities.

If you lose your job, your 20% savings will ideally cover your mortgage and necessities until you are back on your feet. If you are still in a rut paying your mortgage, you can consider refinancing your loan.

Do You Know the 28/36 Rule?

The 28/36 Rule calculates the amount of debt that you and your household should take on. This rule is also used by mortgage lenders to assess one’s borrowing capacity.

This budgeting calculation rules that each household should spend no more than 28% of its monthly income on housing expenses. Similarly, the same household should spend no more than 36% on total debt repayment, from anything from your car loan to student loans.

  • Maximum of 28% of income on housing expenses.
  • Maximum of 36% on debt services.
  • The remaining 36% on savings and wants etc.
  • Because a mortgage is considered a debt, lenders consider any debt loads found outside the 28% and 36% parameters to be unrealistic for an average American to repay, potentially leading to a default.

Author Victoria

Victoria specializes in content writing and editing. She has traveled to almost 40 countries and loves walking her dog in the Rocky Mountains, where she calls home.

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Last Updated: July 16, 2020