What Size Mortgage is right for You
Your lendor should be happy to help you determine the appropriate size mortgage for your home purchasing plans. Your loan officer will guide you through some calculations that will help determine what you can afford in principal, interest, taxes and insurance (PITI) and the resulting toal mortgage amount. This article will help show you the steps involved in this prequalification process.
Three major calculations are used in the prequalification process. These are the Total Debt-to-Income ratio, the Housing-to-Income ratio and the approximation of your monthly principal and interest (PI). The following examples will calculate an approximation of what size mortgage may be appropriate for your financial circumstance.
Work the calculations as shown. This is a guide and does not constitute an official mortgage document.
Your total Debt-to-Income ratio compares any monthly long-term debt payments to monthly income. Monthly debt payments should be no more than 36 percent of your monthly income, but restrictions may vary by lender and mortgage product.
Your Housing-to_Income ratio shows your maximum monthly housing expense compared to your monthly income. Typically, the monthly housing expense is no more than 28 percent of your monthly income, but may also vary by lender and mortgage product
(PI) Monthly principal and interest and total mortgage amount based on the current interest rate must be part of your decision process.
Start with monthly income (both spouses) before taxes (gross). Multiply this monthly amount by 28% to get the Housing-to-Income ratio. Multiply this monthly amount by 36% to get the total Debt-to-Income ratio. Now total your monthly long-term debts (car loans, student loans, credit cards, etc) and subtract that total from your Debt-to-Income number from above. Compare the Housing-to-Income ratio to the Debt-to-Income ratio, the smaller of the two becomes your maximum allowable monthly mortgage payment guide. Now you need to arrive at the mortgage amount you should consider. To do this you need to subtract the monthly tax and insurance amount from the figure above. Your mortgage lender can now show you the amount of mortgage that should be considered based on the current interest rate.
For example:
- 100,000 mortgage at 4.5% - payment 507.00
- 100,000 mortgage at 5.5% - payment 568.00
- 100,000 mortgage at 6.5% - payment 632.00
- 100,000 mortgage at 7.5% - payment 699.00
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