Metro Phoenix Relocation Guide 2008 - (Page 80) Mortgages Home Buying How Much Home Can You Afford? A general rule of thumb is your mortgage payment (principal plus interest) should be about 25 percent of your gross monthly income. Real estate taxes plus insurance will add another 3 to 6 percent. Other monthly living expenses (including food, clothes, auto payments, other loans, charge cards and utilities) should range between 33 percent to 36 percent of your gross monthly income. The balance of your income goes for taxes (federal, state and city) and savings. It's easy to figure an approximate amount for taxes and living expenses. The big question is how to figure out what size mortgage you can afford. Don't forget you'll need at least a 10 percent down payment (and maybe 20 percent) plus closing costs of 2 to 5 percent of your mortgage – cash up front. The basic formula to calculate your monthly payments is: MORTGAGE AMOUNT $1,000 monthly payment or $12,643.20 per year. To figure if this is 25 percent of your gross annual income divide by .25 which equals $50,572.80. You must earn $50,572 to qualify for this mortgage. This is assuming there are no kinks in your credit rating. If this turns out to be good news and you actually can afford a bigger and more expensive house (room that you don't necessarily need at this time), you should consider a 15-year mortgage at 10 percent. Using the formula again, your monthly payments on the same mortgage with the same down payment will be $1,290 per month (120 x $10.75), but now your annual gross income has to be approximately $61,920 to qualify. Your next question may be "Why should I pay more per month for a 15-year mortgage?" Examine the interest table. The interest on your 30-year mortgage will amount to $2,161 x 120 or $259,320, while the interest on your 15-year mortgage is $935 x 120 or $112,000. A difference of a whopping $147,120! Does that answer your question? Also, something else to consider is that the equity in your house accumulates much faster with a 15-year mortgage. You're now in a more positive situation to move to a more expensive house, if you wish. MORTGAGE INTEREST TABLE RATE % 5 5-1/2 6 6-1/2 7 7-1/2 8 8-1/2 9 9-1/2 10 TOTAL INTEREST/$1,000 30-YEAR 15-YEAR $ 911 1,031 1,151 1,271 1,394 1,517 1,643 1,769 1,898 2,028 2,161 $416 466 516 567 618 669 721 773 825 879 935 X PAYMENT FROM BELOW CHART $120,000 $1,000 X $8.78 = $1,053.60 STEP 2 $1,800 MAXIMUM DEBT AMOUNT MORTGAGE PAYMENT TABLE Equal Monthly Payments to Amortize a Loan (per $1,000 value) RATE % 5 5-1/2 6 6-1/2 7 7-1/2 8 8-1/2 9 9-1/2 10 - STEP 3 $1,375 ADJUSTED TOTAL HOUSE PAYMENT 15 YEARS $7.91 8.17 8.44 8.72 8.99 9.27 9.56 9.85 10.14 10.44 10.75 30 YEARS $5.37 5.68 6.00 6.33 6.65 6.99 7.34 7.69 8.05 8.41 8.78 STEP 4 $1,170 PRINCIPAL AND INTEREST AMOUNT QUALIFIES FOR A MORTGAGE AMOUNT OF AT 7 % FOR 30 YEARS. NOTE: The mortgage amount figure for this sample couple is derived from a principal and interest table. These figures will vary by the interest rate and length of mortgage. 80 Relocation Guide™ ➚ You have just found a house for $150,000 and you have a $30,000 down payment plus the closing costs ($2,400 to $6,000). You have to mortgage $120,000. Can you afford it? Using the monthly payment formula for a 30-year mortgage at 10 percent interest you have: CONVENTIONAL BUYER WORKSHEET The following example is based on a family earning $60,000 yearly, with monthly debts (such as car payments and credit cards) of $425 monthly. STEP 1 $5,000 GROSS MONTHLY FAMILY INCOME ➚ X 28% $1,400 MAXIMUM HOUSE PAYMENT $1,800 MAXIMUM DEBT AMOUNT X 36% $425 TOTAL MONTHLY DEBT = = $1,375 ADJUSTED TOTAL HOUSE PAYMENT [$175 +$30] ESTIMATED MONTHLY TAXES + INSURANCE $1,170 PRINCIPAL AND INTEREST AMOUNT $175,710
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