The first thing people usually want to know when they decide to go house hunting is "How much house can I afford?" Sometimes your view of what you can afford is quite different from the mortgage company's view of what can afford!

Before you fall in love with a dream house that is out of reach according to mortgage loan guidelines, take a few minutes to do some calculating.

The result of the process we will step you through is simply an estimate. The amount calculated should be used as a guideline. It is important to remember that only your loan officer can give you a true loan qualification amount. Qualification details including amount down, loan term, loan type, differ by loan program so be sure to talk to your loan officer as soon as possible in the house hunting process.

Following the steps below will result in a calculation of two sets of figures. These represent the low and high extremes of the mortgage amount you may qualify for.

1. Take your total monthly income from all sources and multiply it by .28 and also .40. (These are the low and high extremes that in fact are percentage of your income. You should use both numbers)
2. Subtract your monthly debts. (This should include all personal debts including credit cards, car payments and child support.) This will give you the amount of your income that you have left for your monthly house payment.
3. Find out what your property tax and insurance will equal if paid in twelve monthly installments. Subtract this from the total arrived at in #2. (You may get these figures from an insurance agent and the local government offices where you are thinking about purchasing a home.) This will leave you a net mortgage amount that you can afford. (Principal and Interest).
4. Multiply this amount by 12 months. This will give you your annual mortgage payment. 
5. Divide this amount by the current average interest rate. You may find this out from your local lender. For example: if the rate is 7 1/4%, you would use .0725. The result of this final step will give you the amount of a mortgage that you are likely to qualify for.
6. Now add the amount that you have saved for a down payment and this will give you the approximate price of a house that you can afford.

Low High
Monthly Income Monthly Income

Step 1 X .28 X .40
Subtotal 1 Subtotal 1

Step 2 - Monthly Debt - Monthly Debt
Subtotal 2 Subtotal 2

Step 3 + Monthly Taxes + Monthly Taxes
+ Monthly Insurance + Monthly Insurance
Subtotal 3 Subtotal 3

Step 4 X 12 X 12
Subtotal 4 Subtotal 4

Step 5 ÷ Interest Rate ÷ Interest Rate
Subtotal 5 Subtotal 5

Step 6 + Down Payment + Down Payment
Low Home Price High Home Price

Step 7 Contact your REALTOR® and have fun finding your new home. 

Don't forget to visit a lending institution to get actual qualification numbers. Your REALTOR® will be happy to provide a referral to a lending institution should you desire one. A valid pre-qualification certificate from the lender is an advantage to you when you find the right property and are prepared to make an offer. Sellers like to know that the deal won't through for lack of financing!

Should You Refinance Now?

If you aren't in the market for a new home, refinancing your current home may be a viable option. The most common rule of thumb used to determine the feasibility is: there should be at least a two-percent spread between the old interest and the new rate. The reasoning behind this is that the difference in interest rates will justify the expenses incurred when refinancing.

The fact is that refinancing should be done whenever there is a significant monthly savings and you plan to live in the home long enough to recapture the costs of refinancing.

Please remember that points paid on a refinance are not fully deductible as interest in the year paid. Most tax experts will tell you to get a par value loan when you refinance your home. This will keep your out-of-pocket cash to a minimum. Even though your interest rate may be a little higher when you don't pay "points", in most cases it is fully deductible. For impartial advice about whether to refinance or not, give your REALTOR® a call. Professional real estate advice can help you make the right decision.