How Do I Shop for a Mortgage?

• How Much Can You Qualify For - Self Test
  • Imagine you have just completed a search that included hundreds of hours of looking at the exteriors and interiors of houses. You have sized up siding, reviewed roofing and perused the petunias. And finally, you have found the house of your dreams. Now imagine that this house of your dreams costs much more than you can afford.
  • If you are house hunting and have not done an important piece of homework, you could be in for this kind of heartbreak. The first thing you need to know when shopping for a home is how much you can spend.
  • A general rule is that you can purchase a house valued at twice your annual income, but this does not take into account your debts, a large down payment, or other factors which can add to or detract from the amount you can afford.
  • The purpose of this page is to help give you a more specific idea of what priced house you can afford. It will address what you are worth and what you owe on a regular basis (your assets and liabilities) and what costs you would most likely encounter once you bought your new house. In general, you will be examining the same things a lender looks at when deciding how large a mortgage you can afford.
• Can I Buy This House?
  • Lenders and Realtors will not tell you how much house you can afford. Instead they will calculate how much they believe an institution will loan you. This is two totally different amounts. A lender wants to loan you the maximum loan it feels you will repay. It is up to you to decide how much house you can afford. Only you know what future plans you have for children, retirement, and employment. Even the most affluent among us can get into trouble if they purchase more home then they can afford.
  • The first question you must ask yourself is "what can I afford to spend on a home?"
  • In order to answer that question, you will need to look at the costs involved in buying and owning a home.
  • Completing the worksheets below should save time while shopping for a home because it will narrow your choices based on costs. When you finally do talk with lenders, you will have some answers for many of their questions, speeding up your loan's processing.
  • It should be noted, however, that today many lenders will qualify you in advance for a mortgage, even before you begin to shop for a home. Many lenders advertise this service in the local newspaper, but contact any lender to see if this is possible.
  • Down Payment
    • Lenders expect home buyers to have enough money available to make the down payment (usually up to 20 percent of the asking price for the house) and to pay their share of the closing costs ( 3 percent to 6 percent of the loan amount). You should figure this amount (which will depend on what you decide you can afford) into your home buying budget. The down payment and closing costs are usually made up of money drawn from your total assets. (back to top)
• Your Mortgage
  • A mortgage is the loan you take to buy the house. Most people do not come close to having enough cash assets lying around to purchase a home. That makes a mortgage essential.
  • With a few exceptions, most mortgages are typically repaid in 15 or 30 years. Almost all require monthly payments. Lets suppose you are purchasing a $150,000 home and that you are putting 20% down on the house. You’re down payment would be $30,000 ($150,000 X .20) and your mortgage (the amount of loan you will need) would be $120,000.
  • If the only mortgage options available to you were a 15 or 30 year fixed rate (fixed rate means the interest rate will stay the same for the entire term of the mortgage) your payments would look like this:
  • $120,000 15-year mortgage @ *7.00 percent = $1,079 per month
  • $120,000 30-year mortgage @ *7.25 percent = $ 819 per month
  • *Interest rates are generally a little lower on a 15-year fixed.
  • One of the first things you should notice is how much higher your payment will be on the 15-year fixed. That is because you are paying that loan off in 1/2 the time. Even though your payments are considerably higher, look at the difference in the amount of interest you will pay on the loan at the end of its term: (back to top)
• Mortgage Option Total Payments Total Interest
  • 15-year mortgage $194,147 $74,147
  • 30-year mortgage $294,700 $174,700

  • Even though you are paying much less in interest over the life of the loan on a 15-year fixed, this loan may not be the better loan for you. If the lower payments on the 30-year loan allow you to qualify for the loan, buy a better property, or possibly to save more money into a retirement account, the 30-year fixed may be the better option. Besides, if you want to pay less interest over the life of your loan, you can always pay extra on the principal. Just make sure there is not a prepayment penalty built into the loan program that you choose. If you have a prepayment penalty there will be certain penalties that will apply if you pay down your principal balance early. Restrictions such as this must be clearly spelled out in the loan papers that you sign.

  • Determining the size of the mortgage loan that you can afford can be a little tricky. Once you have determined the total you feel you can afford to spend monthly for housing, you then have to know the costs involved, including the mortgage payment, which combined will equal your housing cost. In addition to the mortgage payment you must also calculate the cost for property taxes and insurance, as well as any association fees and even maintenance costs.
  • First lets start with the mortgage payment. You can figure the size of your mortgage payments yourself by using the chart below. Multiply the relevant number by the size of your mortgage expressed in thousands of dollars. For example, if you will be taking out a $150,000 30 year mortgage at 6.75% you would multiply 150 by 6.49 (see the table below). This would give you a mortgage payment of $973.50.