What's the Home Loan Monthly Payment You Can Afford?

The monthly payment is ultimately what you will be obligated to pay to your lender. It isimportant to make sure you can afford your monthly payments. The size of your monthlypayment can depend on several factors, some of these factors are:

  • size of down payment
  • amount borrowed
  • interest rate
  • repayment term

Generally if the down payment is larger the loan amount will be smaller and thus have alower monthly payment. The larger the amount of money borrowed the higher the monthlypayment. The higher the interest rate the higher the monthly payment. When terms areshorter (say 15 years instead of 30 years) monthly payments are higher.

Lending institutions will use two main guidelines in determining if you can affordthe payments on your loan. These guidelines are:

  • The 28% guideline
  • The 36% guideline

The 28 percent guideline is that a household spend no more than 28% of gross monthly income(income before taxes) on monthly housing expenses. Monthly housing expenses are definedas follows:

Monthly Housing Expenses = loan payment + hazard insurance + real estate taxes + private mortgage insurance


Notice that utility bills are not considered in the monthly housing expenses.

The 36 percent guideline is that monthly housing expenses plus long term debt should not begreater than 36% of the gross monthly income.

Long term debt means financial obligations that will be outstanding for over a year. Thesecould include outstanding debt on the purchase of a car, credit card debt, loans for furniture, etc.

If you are considering an adjustable rate mortgage then be sure to determine your potentiallyhighest monthly payment when checking affordability.

Although lenders do look at these guidelines, they are not hard rules. This means that yourlender might be willing to be flexible. In considering affordability, even with passing thelender's guidelines the lender doesn't mean you can afford the loan. You should be aware ofmajor upcoming purchases and your general financial health, before making the decision. However checking these guidelines gives a good starting point to check if you can indeedafford a particular loan.

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