How Much Of A Home Loan Can I Afford?
You can afford how much you can pay each month, for many years.
Ever caught yourself in a situation where you’re drooling over a house you saw on the internet? A big enough house to accommodate your family, a nice location, a small backyard your kids can play in- and to your surprise, your real estate agent tells you it’s available!
But that doesn’t necessarily mean you can afford to buy it!
Big beautiful homes come with a big price too! So how do you determine the amount of mortgage you can afford and how much home loan you will be able to pay back, monthly.
How does Home Loan work?
The process of getting a home loan through a mortgage lender or company is fairly easy. You pick a house that you like, you go to the mortgage lender and submit your application. After the whole process is complete, you’re approved for the loan- or not.
Assuming that you’re approved, the lender will outline a few conditions with the mortgage loan like how much you’re approved for and how much you have to pay monthly. The repayment plan is also highlighted with a rate of interest that is added each month with the principal amount. Moreover, the house is used as collateral. This means that the lender owns a portion of your house, so if you were to default on the loan, the lender reserves the right to sell the house and fill that payment gap. Until you fully pay the mortgage loan, you aren’t considered as the homeowner.
Home Loan Benefits
Buying a home loan is an easy way of getting a lump-sum amount up front to buy the house of your dreams. But that’s not all, here are the various benefits of getting a home loan:
- An affordable way of buying a house that would otherwise take decades to save that kind of money to buy
- Mortgage loans have a lower rate of interest as compared to a personal loan, usually ranges from 8% to 12%
- Safety of the property because before you’re approved for the loan, the lender will do a full background check to ensure the property is free of legal disputes
- Way of fixing your credit score if you keep paying promptly
- Way of saving on tax due to a number of tax reductions applicable on the loan
Risks of a Home Loan
Where there are benefits to acquiring a home loan, there are definite disadvantages to it too.
- A very long commitment of 15-20 years of loan repayment
- Unpredictability of financial situation during this period may make it difficult to pay back the loan
- A major portion of your income goes to repaying the loan each month
- Loss of investment opportunity because that money could be invested in a fruitful fund
Home Loan Eligibility
To be eligible for a home loan, here is what you need to know:
- A good credit score will land you on a deal with competitive rates
- A low debt-to-income ratio
- A steady source of income to be able to pay back the loan
Essentially, these are the basic things that get you a step closer to being approved for the home loan. But, how do you decide how much home loan you can afford? It depends on several factors, the first and foremost one being how much income you have.
| Home Price | Down Payment | Annual Income |
| $100,000 | $20,000 | $30,905.31 |
| $150,000 | $30,000 | $40,107.97 |
| $200,000 | $40,000 | $49,310.63 |
| $250,000 | $50,000 | $58,513.28 |
The 28/36 rule
This rule has been a successful tried and tested method for so many people while deciding how much they should borrow against their income. The rule simply states that a person should not spend more than 28% of their income on home loans, and 36% on total debt, which includes student loans, car loans etc.
For example, if a person’s monthly income is $9,000, you multiply it by 28 and then divide it by 100. You get a figure of $2,520.
So buy a home loan that does NOT let you pay more than $2,520 each month, because that way you could find yourself in a major financial crunch.
Home Loan Calculator
Another great way to calculate how much you earn is through a Home Loan Calculator available on the internet. All you have to do is enter basic numeric information like the interest rate, cost of the property, your income, downpayment, homeowner’s insurance cost etc., and this way the calculator will tell you what you should be expecting.
Conclusion
Looking at how much income you have will help you determine if you can even afford your dream house. More times than often, people are approved for loans beyond their capacity which in turn leads them to financial hardships.
Because of the interest rate that piles up with the principal amount, it often gets hard for homeowners to pay back the amount in due time. If that happens, the credit record takes a big hit and would make it hard for you to opt for other loan options in the future.
Home Loans are an easy way to get upfront payment for the house you’re looking to buy, but that shouldn’t sweep you off your feet. Make sure you’re only buying what you can afford to pay back for a very long period of time. This isn’t an easy commitment, make sure you’re buying a home loan you can afford.
