realistic look at what you can afford.
New homes are puchased with cash, or with a combination of cash (a downpayment) and a mortgage loan. If you are like most home buyers you will probably have to finance your home purchase with a mortgage loan.
WHAT IS A MORTGAGE?
A mortgage is a consumer loan for the purpose of buying a home, using the home you are buying as security. This loan is registered as a legal document against the title of your property. Important aspects of a mortgage loan include:
Principal: the amount of the loan, or the cash actually borrowed.
Interest: the amount the lender charges for the use of the funds, or principal. Interest rates vary according to many factors, including the term and conditions (see below). The borrower is expected to pay back the principal together with interest.
Mortgage payments are applied toward both principal and interest.
Amortization period: the actual number of years that it will take to repay the entire mortgage loan in full. This normally ranges from 15 to 25 years.
Term: the length of time for which a mortgage agreement exists between you and your lender. Typically, terms range between six months and seven years.
Maturity date: the end of the term, when you can either repay the balance of the principal or renegotiate the mortgage at then current interest rates.
Options: tailoring the mortgage to your personal needs and circumstances. Open or closed mortgages, pre-payment options, fixed or variable rates or portable mortgages are just a few of the options available to today's borrowers.
TYPES OF MORTGAGES
There are two basic types of mortgages available:
Conventional mortgage: the loan amount does not exceed 75% of the property value.
High-ratio mortgage: exceeds 75% of the property value (up to 95% for first-time homebuyers)
Making a low downpayment allows purchasers to buy a home sooner, shop for homes with a wider price range, or set cash aside for landscaping, home furnishing and other expenses.By law, high-ratio mortgages must be insured. The borrower pays an insurance premium (usually up to 2.5% of the loan amount) which can be added to the mortgage loan or paid in a lump sum in advance.
The borrower must also pay an insurance application fee, legal fees and the fee for a property appraisal.
HOW MUCH CAN YOU AFFORD?
How much you can afford to spend for a new home is determined by two factors:
1)The amount of down payment you have available. A larger down payment will decrease the amount you need to borrow. This can lower your mortgage payment or, even better, help you pay off the mortgage as quickly as possible, thereby saving thousands of dollars in interest payments.
2)Your ability to carry the mortgage debt. A simple two-step method helps you to determine the mortgage amount that you can comfortably pay back on your income.
Step One: Calculate the maximum monthly payment you can afford
Most lenders recommend that you use no more than 32% of gross income on your monthly payments to cover principal, interest, property taxes and heating costs.
Gross household income is the total salary, wages, commissions and other assured income, before deductions, by all household members who are co-applicants for the loan.
Step Two: Calculate the size of the mortgage loan your payment will handle
Once you have worked out how much you can afford in monthly payments, you can determine the maximum amount of the mortgage loan that you qualify for. Subtract the estimated property taxes and heating costs from the total maximum monthly payment (Step One). The remaining sum is what you have available for the principal and interest.
Example:
Monthly payment $1,467
Less estimated monthly taxes and heating $ 275
Available for principal and interest $1,192
The amount of the mortgage loan that can be serviced with a $1,000 monthly payment depends on the interest rate at the time, the lower the interest rate, the higher the amount you can borrow.
Try and use a real estate and mortgage/lending professional to guide you through the purchase process.
This is a general guideline for financing, please check with your local authorities for exact or specific information.
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