By Maggie Park
Stop thinking about the biggest mortgage you can get. Before you ever meet with a mortgage broker, figure out how much mortgage you can truly afford. There’s a fine line between “stretching” to buy the biggest house you can and being “house poor.”
The Case for Stretching
If you have kids, you may want to “stretch” to be in a coveted school district. Choose a district that has both great elementary and high schools. The quality of a high school can affect college acceptance later on.
In addition to choosing a great school district, many people suggest “stretching” because moving is expensive and unpleasant. Certainly, you want to avoid an unnecessary move because you outgrew your home.
The Case against “Stretching” Too Far
When you are “house poor,” you have trouble making ends meet. You live paycheck to paycheck and obsess over fuel costs and grocery money. Sometimes, you even wonder if you could qualify for government assistance since there is no money for basics. This frustrating situation is often caused by “stretching” too far and maxing out your mortgage payment.
Being “house poor” can affect marriages, kids, and even relationships with family and friends. Therefore, find out how much house you can really afford, not how much house your mortgage broker says can qualify for.
How to Find the Perfect Balance
According to CNN, most lenders use a liability-to-income ratio to approve mortgages. The usual number is 36 percent. In addition to this ratio, CNN suggests that you consider your payment-to-income ratio and keep this total between 28 and 33 percent.
Liabilities include any monthly payment, such as your car payment and your credit cards. For the purpose of calculation, lenders use the minimum payments listed on credit cards, but you may want to use a more aggressive number.
Other financial specialists have different opinions about the how much of your income should be spent on a mortgage payment. Dave Ramsey suggests 25 percent and is emphatic about having a rainy day fund in place before purchasing. Ramsey says that buyers who don’t have an “emergency fund” will face financial hardships when typical home-improvement issues arise.
Lowering Your Mortgage Payment
You can lower your mortgage payment before you even purchase your new home. Start with a large down payment. When you put down at least 20 percent, you can eliminate expensive private mortgage insurance (PMI).
You can also lower your payment by lowering your interest rate. The secret is great credit. If your credit score is lower than you’d like, you can systematically raise it. The Internet is full of credit-raising tips, such as paying down your credit card balance, and avoiding department store credit cards.
A great way to save tons of money is to choose a shorter-term loan, such as a 10- or 15-year mortgage. These loans have lower rates than 30-year mortgages. Of course, the payment may be slightly higher, but you will save big bucks over the life of the loan.
When you lower your mortgage payment and keep it in a realistic range, you can “stretch” as far as that number will allow. Soon, you’ll find your dream home and enjoy a mortgage that doesn’t keep you “house poor.”