Your purchase of a home will be one of the largest, most important purchases you will make in your life. There are few things that cost as much; and few things which will affect your life as much either. It would only make sense, then, to educate yourself on how the home buying process works and what to expect from your mortgage, right? There are many different types of loans, the most common being VA (0% down pmt), USDA (0% down), and FHA (3.5% down) which are all government-backed, as well as Conventional loans (3% down). You may know that interest rates change often, but so do the guidelines and qualifications for the different types of loans! This knowledge is helpful, but your big question is likely “What will my monthly payment be?”
WHOA…let’s cover a very important piece of the puzzle first: How much monthly payment can you afford? Lenders will be looking at your Debt-to-Income Ratio, which is determined by comparing your monthly expenses to your monthly income. This is how a bank or lender determines how much mortgage payment you can afford. By dividing all of your monthly liabilities (including your proposed house payment) by your gross monthly income, they come up with a percentage. And this ratio must fall under a certain number in order to qualify for a mortgage. The maximum debt-to-income ratio will vary by mortgage lender and loan program, but typically most mortgages have a max DTI ratio of 45% (to reach a ratio this high, you’d have to meet credit score and money reserve requirements).
Now, back to your burning question. Your monthly mortgage payment will hinge heaviest on three things: the amount of money you’ve borrowed, your loan interest rate, and your loan term. For borrowers using a fixed-rate mortgage, you can put in these three figures in a mortgage calculator and calculate your monthly payment; and you’ll know that the payment won’t change as long as the loan is
in effect. This is because the interest rate on a fixed-rate mortgage doesn’t change-even when the market mortgage rates move higher or lower in the future. For borrowers that go with an adjustable- rate mortgage (ARM), your mortgage interest rate-and therefore your monthly payment-is subject to change. With an ARM, your loan’s rate will remain unchanged for a certain number of years (most common period is 5-7 years). After this period ends, rates can change up to once per year. An ARM probably sounds less desirable to you right now, but remember-sure, they may adjust higher, but they may adjust lower too. Lower interest rates are common during economic weakness and uncertain growth.
Before you go, let’s touch on a couple important things you’ll want to keep in mind. First, financial experts recommend that housing payments stay within 30% of your total monthly income. Don’t find yourself at your house payment max! It won’t be much fun to live in your new home if you can no longer afford anything else. Last, remember that your monthly mortgage payment will also include homeowners insurance, real estate taxes, and sometimes association dues.
With the proper financial planning and educating yourself on the mortgage process, you’ll be well on your way to buying your home!
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