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 is important to make sure you can afford your monthly payments. The size of your monthly payment 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 a lower monthly payment. The larger the amount of money borrowed the higher the monthly payment. The higher the interest rate the higher the monthly payment. When terms are shorter (say 15 years instead of 30 years) monthly payments are higher.

Lending institutions will use two main guidelines in determining if you can afford the 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 defined as 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 be greater than 36% of the gross monthly income.

Long term debt means financial obligations that will be outstanding for over a year. These could 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 potentially highest monthly payment when checking affordability.

Although lenders do look at these guidelines, they are not hard rules. This means that your lender might be willing to be flexible. In considering affordability, even with passing the lender's guidelines the lender doesn't mean you can afford the loan. You should be aware of major 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 indeed afford a particular loan.

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