How Much Home Can You Afford? What's In A Price?

When it comes to buying a home, you need to focus primarily on what makes up each monthly payment. Simply put, it's called PITI, which stands for principal, interest, taxes and insurance. To determine your average monthly payment, lenders suggest devoting no more than 28 percent of your gross income to PITI. Of course, how much home you can afford depends greatly on other factors as well: your income, credit, savings and financing, to name a few variables.

Getting Down To Payment

Often, coming up with the down payment is the single biggest hurdle new homebuyers face. That's why, today, many first-time buyers don't put down 20 percent (the traditional amount); 10 percent down payments are more like it; and even 5 percent down payment programs are available. Of course, by putting more money down initially, your outstanding home loan and monthly payments shrink.

Besides having cash reserves to put down on a home, you also need to consider closing costs. These expenses include, among other things, title insurance and escrow fees, loan origination fees or points (one point equals 1 percent of the loan amount), prorated interest on the loan and prorated property taxes, local taxes, appraisal and credit report fees, and hazard insurance.

Types of Mortgages

Mortgage loans come in a variety of shapes and sizes, including conventional, federal and state financing programs. Besides fixed versus adjustable interest rates, one of the most important factors in choosing a loan is the term of the mortgage. Thirty-year mortgages have long been the industry standard, but with interest rates as low as they are these days, more buyers are opting for 15-year and even 10-year mortgages. While the payments on these loans are higher that they would be on a 30-year mortgage, and qualifying for these loans is understandably more difficult, the total interest savings over the life of the loan are considerable. For instance, on a $160,000, 30-year mortgage at 7.2 percent, you would pay $231, 040 in interest over the life of the loan. On a 15-year loan at 6.7 percent, you would pay only $94,110 in interest over the life of the loan.

Besides 10 and 15-year loans, shorter-term balloon mortgages also have come into vogue recently. Examples of these are 30-due-in-5 and 30-due-in-7 mortgages.

These loans have payments based on a 30-year amortization schedule, but they are due in either five or seven years. These balloon payment loans have lower interest rates and smaller payments that standard 30-year fixed mortgages.

Financing Information

The terms of your mortgage loan are very important to your ability to make the monthly payments and meet all your other obligations. Under a standard conventional mortgage loan program, a lender will loan you up to 80 percent of your home's purchase price. In order to be approved for a conventional mortgage, your housing costs must total no more than about 28 percent of your gross income, and your total debt must equal no more than about 36 percent of your gross income. You will also need savings equal to two or three months of housing expenses.

Private Mortgage Insurance (PMI) allows you to purchase a home with as little as 5 percent down. This insurance is paid for by you and insures the lender for any losses incurred due to your default. The major PMI companies recently introduced a new payment structure, which eliminates the up-front payment of the first year's premium by charging a slightly higher monthly fee over the term of the insurance.

In addition to private mortgage insurance, the federal government offers two low-down payment mortgage financing options; the FHA Mortgage Insurance Program, the VA Home Loan Guarantee Program, and the Cal-Vet Program. Loan programs through the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are other saving options--your REALTOR¨ has more details.

Rates

For daily rates in California and mortgage news, see www.interest.com.

Credit Scoring

Check out the "Doorway to Good Credit" brochures, updates and important internet resources related to credit scoring.