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. 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. The Zions Bank Mortgage Qualification 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.
# 1: Income and debt
When it comes to your mortgage budget, income is only half of the equation — existing debt and monthly expenses will also play a role.
One rule of thumb that some lenders use is to require that total household debt — including housing, car loans, student loans and credit cards — does not exceed 45% of your gross income.
Guidelines aside, it’s important to look at your entire financial picture when determining the mortgage payment you can afford.
#2: Mortgage rates
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.
The mortgage rate you are quoted is determined by your credit score, debt-to-income ratio (DTI), loan type and lender.
You can consult the Zions Bank Mortgage Qualification Calculator to see how different interest rates factor into your mortgage payment.
#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.
You’ll also be responsible for closing costs and fees. Some lenders — including Zions Bank — offer programs to help 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 — also known as PMI — which ranges from about 0.55% to 2.25% of the original loan amount per year.
#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.
#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.
Zions Bank offers programs to help first-time homebuyers conquer affordability challenges, including low down payment requirements, down payment assistance and competitive interest rates. Contact a Zions Bank mortgage loan officer to learn more.