How much can I borrow and what are
housing expenses?
We get frequent question from listeners asking how much can
I borrow? The exact amount one can borrow depends on a number of factors , for
example – annual income, down payment amount,
credit score, loan term, loan program, interest rate, property type, HOA
dues, and additional liabilities like
credit card debt , car payments, child support, alimony. A simple rule of thumb
is one can borrow roughly around 5 times gross annual income.
Consider a specific example of purchase price of $700K, loan
amount $560K, 20% down payment of $140K, single family owner occupied home with
no HOA fees, monthly credit card and car loan of $300. Under these conditions,
borrower needs an annual income of $113K for 30 yr fixed term at 5% interest
rate. Ratio of loan amount/annual income is 4.9. On other hand if the rate drops to 3.25% for a 7/1 ARM
product, required annual income is $97K and so ratio of loan amount to annual
income is changed to 5.7.
The graph below shows the effect of interest rate on the maximum loan amount one can borrow and corresponding monthly payments. loan amount and your monthly payments.
Other question asked frequently is – I want to buy a house
but do not want to spend more than my current monthly rent, say $2000. A rule of thumb is that your effective monthly payment is only 50-60% of
your monthly housing expense. If one is paying $2000/month rent one
should consider buying a home with monthly housing expense of roughly twice
that amount of $4000/month.
Consider again the same example discussed above at 5% rate, one
has to pay interest of about $2330, principal of $670, property taxes $670, property insurance $80. Both Interest
and property taxes of $3000 are tax deductible and can save you about
$1000/month if you are in 33% incremental tax bracket. In addition, principal payment of $670 is
also forced saving. So effective monthly payment is $3750-$1000-$670 = $2050.
Pie chart below shows relative distribution of different items.
The above numbers provide a rough analysis. One should
always consult a qualified tax adviser for tax benefits. For a detailed
analysis of your particular mortgage situation, ,rate quote, and pre-approval letter, please contact us by
filling preliminary form at our website , http://RekhaChatwani.com
and select loan application from menu bar on left side, or email Rekha Chatwani
Nice blog
ReplyDeleteGood and informative
Thanks for blogging
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