Homeowners become accustomed to thinking of the mortgage payment, taxes and insurance as one check sent each month to a mortgage servicing company.
They forget all the "lenderese" about loan to value, 28/36 ratios and PMI.After a few years, they're ready to move up to a bigger or better house, but how much can they afford? They remember that most lenders will allow buyers to spend up to 28 percent of gross income on mortgage, taxes and insurance and have total debts of 36 percent. And they recall that the buyer has to provide an insurance policy - private mortgage insurance - if the down payment is less than 20 percent, plus pay for homeowner's insurance.
Here's how you can figure out how much more house you can afford. While lenders and real estate agents will be glad - even eager - to help put the numbers together, you might prefer to get an idea first so you can decide whether it's worth the trouble to go house hunting.
The following work-sheet, put together by HSH Associates, a mortgage information service, is an easy way to do the calculations, especially if you want to move to another house in the same area and know where to find tax and insurance information.
First, estimate what the taxes would be on the kind of house you have in mind. The county assessment office can tell you the tax rate and how to do the calculation. Or you can make an estimate based on the taxes you now pay.Next, call your insurance agent and ask what the insurance rate would be on a more expensive house, or estimate the cost from your own insurance payments.
Add the annual taxes and the annual homeowner's insurance costs on your target house and divide by 12 to get the monthly cost.
Then, add up any installment payments you make each month. Include in this list any long-term debts such as car loans or court-ordered child support. Don't include credit card bills that will be paid off within 10 months, or utilities or child-care costs or routine household expenses.
Finally, use last year's tax return or your paycheck stubs to get your gross annual income - income before taxes and other expenses are deducted. Include your salary, your spouse's salary, dividend income and any alimony you might receive. Divide the annual figure by 12 to get the monthly gross income.
Now, you're ready to plug numbers into a worksheet. Remember to use monthly, not annual, figures.
1. List monthly real estate tax and homeowner's insurance.
2. List monthly installment payments.
3. List monthly gross income.
4. Multiply the monthly gross income by 0.28. Then subtract the monthly real estate tax and homeowner's insurance payments. The resulting figure is Amount A.
5. Multiply the monthly gross income by 0.36.
6. Subtract the total of the monthly real estate tax, homeowner's insurance and monthly installment payments from the figure on Line 5. The resulting figure is Amount B.
The lesser of Amount A and Amount B is the approximate monthly payment you can afford for mortgage principal and interest.
Use the accompanying chart to find out how much of a mortgage your monthly income will buy. Figures are for a 30-year fixed rate mortgage at 9.5 percent interest. Interest rates slightly higher or lower generally will make a difference of a thousand dollars.
Here's an example of how the work-sheet would look, using a family with gross annual income of $80,000, real estate taxes of $3,000 a year, homeowner's insurance payments of $300 a year and installment payments of $300 a month:
Monthly real estate taxes and homeowners insurance - $275; monthly installment payments - $300; Monthly gross income - $6,666.
Multiply monthly income by .28, and subtract taxes and insurance -$1,591 ($1,591 is Amount A). Multiply monthly gross income by 0.36 - $2,399. Subtract taxes, insurance and installment payments - $1,824($1,824 is Amount B).
In this case, the lesser of Amount A and Amount B is $1,591. So this family can afford a mortgage in the $178,300 range. If they have $30,000 to $40,000 equity or savings for a down payment, they could buy in the $205,000 to $220,000 range.
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(Additional information)
Bottom line on mortgage
Monthly Mortgage
payment You can Afford
$ 750 $ 89,100
$1,000 $118,900
$1,250 $148,600
$1,500 $178,300
$1,750 $208,100
$2,000 $237,800
$2,250 $267,500
$2,500 $297,300
$2,750 $327,000
$3,000 $356,700