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Introduction to Mortgages
Mortgaging your house or any part of your asset is in some cases a legal obligation when it comes to taking a loan. A mortgage can be simply defined as part of your asset being held up in exchange (like collateral) when you’re asking for a loan from banks or any organizational entity.
A home mortgage life insurance is basically held up as part of the legal transaction until you pay off the loan fully along with interest. If someone can’t pay their mortgage on time, it will heavily affect their credit scores leading to difficulty when applying for more loans. A bad credit score stays on your profile for up to seven years- so make sure your mortgage payment is always paid on time.
The policy’s length will determine the number of years you have until you fully pay off your mortgage. In such a case, your house lender is the beneficiary. In case you die, the insurance company will pay off the remaining debt to your broker, NOT your spouse or your family.
People can have a joint mortgage life insurance plan; for instance with their spouse. If both the people die at the same time, the company will cover the mortgage life insurance cost and pay off your house lender. If one of the two people dies, the spouse will have to continue paying.
Mortgage Affordability Rule of Thumb
The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28% of your gross monthly income (your income before taxes are taken out). In simple words, 28% of your income should go to mortgage. For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.
A debt-to-income ratio (DTI) is a measurement metric that simply evaluates how much debt you have against your current income. More DTI will reduce your chances of being qualified. The DTI should not be more than 50%, and you’re in the safe zone if it is below 43%.
A good debt-to-income ratio to qualify for a mortgage is around 35%, but lenders prefer that it be below that. And of that total debt, not more than 28% should be going to repay the mortgage loan.
For example, assume your gross income is $5,000 per month. The maximum amount for monthly mortgage-related payments at 28% would be $1,400 ($5,000 x 0.28 = $1,400).
Your lender will also look at your total debts, which should not exceed 36%, or in this case, $1,800 ($5,000 x 0.36 = $1,800). In most cases, 43% is the highest ratio a borrower can have and still get a qualified mortgage. Above that, the lender will likely deny the loan application because your monthly expenses for housing and various debts are too high as compared to your income.
What Percentage of your Income should go to what?
Every household has their own way of budgeting their expenses against income. For some people education loans are a priority and for some people mortgage loans are necessary to be paid off. According to the 50/30/20 rule designed by financial experts, it is considered a wise decision to split your income.
At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities like food and rent, while the remaining 30% goes toward discretionary items and spendings.
Mortgage-to-Income Ratio Calculator
To calculate how much mortgage you need, there are several ways to calculate the ratio online, for instance websites like Mortgage Calculator help you in giving an estimate of what you should be expecting.
How much you can borrow for a mortgage depends on your credentials (your income) and the calculator will give you an even better estimate of what you should expect. It is important to make sure to borrow only what you need, because sometimes premiums are so high that they really shake up your monthly budget.
And before you even begin to pay off the mortgage loan, you’re actually looking for decades of debt and loans that need to be paid. Make sure all your options are properly weighed down before you even look for a mortgage. Also, it is always better to shop around for the best rates and low interest so that your budget isn’t shaken to the core. Consult experts to know how much percentage is suitable for your particular case.