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Mortgage 101: How Much Home Can You Afford?

Consider these 5 financial factors to help determine how a home mortgage will fit into your budget.

Kallee Feuz Oct 21, 2020

Home ownership may be part of the American dream, but it can quickly turn into a financial nightmare for those who stretch their budgets too thin.

New data show the danger of spending too much on housing. A housing analysis by The Ascent found that people who spend at least 30% of their income on housing are especially vulnerable to the pandemic economy.

While the study looked specifically at renters, overspending can be equally hazardous for homeowners when hard times hit. That’s bad news for many Americans, who shell out on average one-third of their household budget on housing, often at the expense of saving for retirement and college.

The key to happy homeownership is not only finding the home of your dreams but finding a house you can afford. Rather than relying on how much a bank is willing to lend, do your own math to figure out how a home mortgage will fit into your budget.

Zions Bank’s mortgage calculator is a great place to start, but you’ll also want to consider the following 5 factors to help determine how much house you can afford.

Financial Factor 1: Income and debt

A general rule of thumb is to allocate no more than 28% of your monthly gross income for your mortgage payment, including property tax and homeowners’ insurance. Income, however, is only half of the equation — existing debt and monthly expenses will also determine your housing budget.

Some financial guidance calls for a 28/36 affordability rule to establish a baseline of what you can afford. The rule holds that, along with keeping housing expenses below 28% of your pretax income, total debt household debt — including housing, car loans, student loans and credit cards — should be no more than 36% of your gross income.

Financial Factor 2: Mortgage rates

In 2020, record-low mortgage rates have increased purchasing power for homebuyers. But the mortgage rate you are quoted is also determined by your credit score, loan-to-income ratio, loan type and lender.

Because rates and loan terms vary between lenders, shopping for a home mortgage before you begin your home search will help you home in on a budget. A small difference in rates, even a fraction of a percentage point, can amount to thousands of dollars over the life of the loan.

Check out this mortgage calculator to see how different interest rates factor into your mortgage payment.

toy house with assorted coins

Financial Factor 3: Upfront costs

Depending on the type of mortgage loan you choose, you will need to put down anywhere from 3% to 20% of the purchase price of the home. For a $250,000 house, that’s a down payment of between $7,500 and $50,000.

You’ll also be responsible for closing costs and fees. Some lenders offer first-time buyer assistance programs to help first-time homebuyers with closing costs or down payments.

If you are making a down payment of less than 20%, plan to pay for private mortgage insurance (PMI), which ranges from about 0.55% to 2.25% of the original loan amount per year.

Financial Factor 4: Anticipated expenses

When it comes to the price of home ownership, your monthly mortgage payment is just the tip of the iceberg. Remember to factor in utility bills, taxes, homeowners insurance, possible homeowners association fees, upkeep and repairs. And first-time homebuyers may need to budget for additional items like a lawn mower and furniture.

Financial Factor 5: Mortgage options

While the 30-year conventional, fixed-rate mortgage is the most popular loan type, you may opt for a loan with a shorter term, adjustable interest rate or government backing as you consider your needs and budget.

Some loans are structured to have fewer out-of-pocket costs or lower monthly payments, while others might yield savings in overall interest payments.

A Zions Bank mortgage loan officer can help you find the right mortgage to meet your budget and financial needs. Zions Bank takes pride in serving local communities and making home loan decisions locally.

Loans are subject to credit approval. Terms and conditions apply. See a banker for details.

Kallee Feuz is a Public Relations officer for Zions Bank.

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