How Much Home Can
You Afford? What's
In A Price?
When it comes to buying a home, you need to focus primarily on what
makes up each monthly payment. Simply put, it's called PITI, which
stands for principal, interest, taxes and insurance. To determine your
average monthly payment, lenders suggest devoting no more than 28
percent of your gross income to PITI. Of course, how much home you can
afford depends greatly on other factors as well: your income, credit,
savings and financing, to name a few variables.
Down To Payment
Often, coming up with the down payment is the single biggest hurdle
new homebuyers face. That's why, today, many first-time buyers don't put
down 20 percent (the traditional amount); 10 percent down payments are
more like it; and even 5 percent down payment programs are available. Of
course, by putting more money down initially, your outstanding home loan
and monthly payments shrink.
Besides having cash reserves to put down on a home, you also need to
consider closing costs. These expenses include, among other things,
title insurance and escrow fees, loan origination fees or points (one
point equals 1 percent of the loan amount), prorated interest on the
loan and prorated property taxes, local taxes, appraisal and credit
report fees, and hazard insurance.
Types of Mortgages
Mortgage loans come in a variety of shapes and sizes, including
conventional, federal and state financing programs. Besides fixed versus
adjustable interest rates, one of the most important factors in choosing
a loan is the term of the mortgage. Thirty-year mortgages have long been
the industry standard, but with interest rates as low as they are these
days, more buyers are opting for 15-year and even 10-year mortgages.
While the payments on these loans are higher that they would be on a
30-year mortgage, and qualifying for these loans is understandably more
difficult, the total interest savings over the life of the loan are
considerable. For instance, on a $160,000, 30-year mortgage at 7.2
percent, you would pay $231, 040 in interest over the life of the loan.
On a 15-year loan at 6.7 percent, you would pay only $94,110 in interest
over the life of the loan.
Besides 10 and 15-year loans, shorter-term balloon mortgages also
have come into vogue recently. Examples of these are 30-due-in-5 and
These loans have payments based on a 30-year amortization schedule,
but they are due in either five or seven years. These balloon payment
loans have lower interest rates and smaller payments that standard
30-year fixed mortgages.
The terms of your mortgage loan are very important to your ability to
make the monthly payments and meet all your other obligations. Under a
standard conventional mortgage loan program, a lender will loan you up
to 80 percent of your home's purchase price. In order to be approved for
a conventional mortgage, your housing costs must total no more than
about 28 percent of your gross income, and your total debt must equal no
more than about 36 percent of your gross income. You will also need
savings equal to two or three months of housing expenses.
Private Mortgage Insurance (PMI) allows you to purchase a home with
as little as 5 percent down. This insurance is paid for by you and
insures the lender for any losses incurred due to your default. The
major PMI companies recently introduced a new payment structure, which
eliminates the up-front payment of the first year's premium by charging
a slightly higher monthly fee over the term of the insurance.
In addition to private mortgage insurance, the federal government
offers two low-down payment mortgage financing options; the FHA Mortgage
Insurance Program, the VA Home Loan Guarantee Program, and the Cal-Vet
Program. Loan programs through the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac) are other saving options--your REALTOR¨ has more details.
For daily rates in California and mortgage news, see www.interest.com.
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