Before You Buy, Decide If You Can Afford the Home Loan

Your home is one of the biggest financial commitments you can make. In fact, since a home costs so much, you will likely need a loan in order to buy it.

Since you need a home loan to make your purchase, it’s important to understand whether or not you can afford to repay the mortgage. It takes decades to pay off a home, so getting the right loan at the outset is important.

Determining Whether or Not You Can Afford a Home Loan Payment

The general rule of thumb is that you should limit your home payments to 30 per cent of your monthly income. In order to make this calculation, though, you need to know what your monthly payments will be.

One of the best ways to start your determination is to find a good home loan calculator. You can plug in the loan amount, your payment frequency (monthly, bi-weekly, or weekly), your loan’s term length, and the interest rate. Using this information, the calculator will figure out how high your payment should be.

Once you know how much you can expect to pay on your home loan, you can begin to figure out whether or not you can afford a certain mortgage. If your monthly income is $4,500, then, if you use the 30 per cent rule, the most you can pay for a mortgage is $1,350 each month.

The frequency of your payments, as well as your loan term, affect how much of a payment you make each month. For example, if you borrow $250,000 at 3.75 per cent for your home loan, and pay monthly over a 25-year term, your monthly payment is $1,285. You can make your home more “affordable” by adjusting some of the factors that influence your loan.

By lengthening your term out to 30 years, you can get a home that costs $290,000, since now your monthly payments are $1,343. If you can qualify for a better interest rate, you will also see a lower monthly payment.

Another consideration is cash flow. Maybe it doesn’t make sense for you to pay the entire home loan payment at once during the month. It can be difficult to come up with that much money all at once due to the timing of your paycheck or other factors. As a result, some borrowers prefer to pay bi-weekly. That way, they pay a smaller amount every other week. In some cases, this can be more manageable. You still pay your total payment, but it’s more manageable for many if they can match up smaller payments with their paychecks.

Do You Have to Stick with the 30 per cent Rule?

Of course, whether or not you can afford your home loan also depends on your comfort level. Even though the rule of thumb says that you should limit your home loan payment to 30 per cent of your monthly income, it doesn’t mean that you have to follow the rule exactly. If you are concerned about your ability to pay, you might decide to limit your home loan payment to 25 per cent of your monthly income. Or you might know that you can handle up to 35 per cent of your income.

Carefully consider what makes sense for you, and then choose a home loan that fits your needs and your pocket book.

About the Author

Miranda writes about financial topics for several web sites. Her blog is Planting Money Seeds, and her book, Confessions of a Professional Blogger, is available on Amazon.