How Much Mortgage Can I Afford? How Do You Get the Best Mortgage Rates?
The question, “How much mortgage can I afford?” has a complex answer. There is no short answer because there are many considerations to take into account. It’s important to understand what a mortgage is and the steps required to apply for one and acquire the best rate.
A mortgage, or mortgage loan, is a loan that uses the property or real estate as collateral for the loan. This amounts to the bank giving a loan to allow the borrower to be able to purchase the property. The borrower then pays off the loan in installments until it is paid in full, typically over thirty years. When the loan is used to buy a new home, it is called a home loan. The new home then becomes collateral in the event that the borrower defaults on the loan. There are two reasons to obtain a mortgage: to buy a new home when the individual or family cannot come up with the money on their own, or to borrow money for other needs against their home.
There are different types of mortgages. They are categorized according to several criteria:
- Term dates, which can range from 5-50 years
- Interest rates, which are typically either fixed or variable
- Amount of payments per period
There is plenty of risk for both sides with a mortgage loan. Lenders cannot be sure that the borrower will be able to pay off the loan completely in the future, and borrowers could lose their home if they cannot pay. In the event of a default, the lender can legally foreclose on the property, evict the borrower, and auction the property off.
Mortgage- How Much Can I Afford?
Before you begin the process of securing a mortgage loan, you must determine how large of a loan you can handle. You don’t want to obtain a loan that you cannot pay, and most lenders will not allow you to do so anyway. Here are some tips for figuring out how much you can afford:
- Examine your household budget. Take note of all bank accounts, your monthly income, and all debts that you are currently liable for.
- Take the 36 percent rule into account. This is a rule for financial stability that recommends you spend no more than 36 percent of your gross income on total debt. This means that you need to look at your other debts and determine if there is room to add an extra debt to the mix, without exceeding 36 percent.
- Factor in long-term goals. If you want to have something left for retirement, investments, or travel, you might consider a smaller mortgage loan. On the other hand, if you need a larger home for a growing family, you might consider an adequate loan as a worthy investment.
How Do I Obtain a Mortgage?
There are several steps to take in order to get a mortgage loan. Once you have determined the type and size of the loan that you need, you should follow these steps to get a loan and achieve your financial goals:
- Strengthen your credit. The first thing a lender will look at when considering whether to loan to you is your credit score. If it is less than favorable, they will want to look at your credit report to find out why. You should do the same thing. Obtain a copy of your credit score and credit report. Take a look at any debts that; might be lowering your score. You should take steps immediately to begin resolving the issue, which might mean arranging payments to begin paying off debts. Make sure to factor this new debt into your budget and determine how it will affect the size of the loan you can seek
- Build your savings. Lenders will also look at your income and assets. It’s important to have significant savings to help with the loan, plus any extra cost of the home that the loan doesn’t cover.
- Get pre-approved for a mortgage loan. Waiting until you find the perfect home will set you back, both in terms of receiving a loan and buying the home. Getting pre-approved will give you more options in regards to how much the lender will give you and the terms you can get. It will also show the home’s owner that you are serious and have sufficient financial backing.
- Consider your options. When you apply for pre-approved, you will likely learn about loan options that are available to you. These options include term dates, interest rates, and FHA loans.
Best Mortgage Rates
Supply and demand for mortgages on the market can influence the types of rates that borrowers can obtain when applying for a loan. Sometimes, lenders can offer low rates and other times, they must offer higher rates – it all depends on the market. However, borrowers who sign on for higher rates can later sign a new agreement when rates are lower, provided they satisfy certain conditions. This process is called refinancing.
How do you get the best mortgage rates from the start? Here are a few tips to help you.
- Improve your credit score. Again, your credit is very important to obtaining a mortgage loan. But even if it is good enough to obtain the loan, you still might end up with a high rate. Raising your credit score will lower your mortgage rate.
- Take stock of your employment history and income situation. As a general rule, you should remain employed in the same position for two consecutive years. You could also move up to a higher-paying position within that time, but stability is the key here.
- Maintain a low debt-to-income ratio. This is the ratio of all your debts to your monthly gross income. A low ratio equals a lower mortgage rate.
- Have enough savings for a down payment. Most lenders will need to know that you can pay a down payment of 20 percent of the home’s price. A down payment of lower than 20 percent will result in a loan that is a higher risk for the lender, which will increase the mortgage rate and add private mortgage insurance to the price.
Mortgage loans are complicated and involve many factors. If you don’t take the time to weigh your options and judge your current financial situation, you could end up with a loan that is too much for you, which could lead to you defaulting on the loan and the lender taking your home. You should follow the above steps for preparing for a mortgage loan, obtaining one, and getting the best mortgage rate. This will allow you to achieve your goals without drowning in debt.
January 15, 2019; UPDATED May 22, 2019.