Tips for determining the right-sized mortgage

Most of us need a mortgage to buy a home. So determining the size of a mortgage is likely the most critical part of the process, some may argue it is more important than picking the actual house or condo.

Ideally, the right mortgage fit means that the homeowner is comfortable with the size of their mortgage payment, and should fit with other financial concerns as well as future personal and financial goals. An individual or couple will need to consider these matters in a manner that is realistic, pragmatic and strategic as they input numbers into a mortgage calculator. Below are four tips for addressing these concerns:

1. Figure out your budget: The traditional rule of thumb for a mortgage amount is between two and three times the amount of an individual or family’s annual gross income. Budget concerns also include student loans, car payments and credit card balances, which can push that mortgage amount down. Banks will likely look at debt accrued anyway, so its best to do this before applying.
2. Downpayments will impact the amount: Larger downpayments can mean lower monthly payments and a lower rate of interest. A general rule of thumb should be about 20% down. However, if prices are going up quickly, it may make more sense to buy sooner with less money down.
3. Consider how much is paid out: Lenders generally like to see applicants whose monthly expenses are about 43% of gross income (including the potential mortgage payment). Applicants should be careful even if a lender is open to a higher percentage.
4. Look at what is paid in rent: Ideally, a mortgage payment can be about one-third more than is currently spent on rent (unless you’ve been saving on rent for a significant downpayment by living cheaply with roommates). Lower that amount if your rent has been a struggle to pay each month while saving up.

Make sure the numbers add up

The new homeowner should not be “house poor,” so err on the side of caution. If the perfect house is at the highest reaches of your mortgage budget, it may make sense to take in a renter for that extra bedroom or basement space. The key is to make sure the numbers add up. Those with questions or concerns can seek advice from a real estate attorney who can tailor advice to fit the specifics of an individual’s or family’s circumstances.