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4 Tips to Determine How Much Mortgage You Can Afford

By knowing how much mortgage you can handle, you can ensure that home ownership will fit in your budget.

Here are six surefire ways you can get your finances in order before you buy a home.

Homeownership should make you feel safe and secure, and that includes financially. Be sure you can afford your home by calculating how much of a mortgage you can safely fit into your budget.

Instead of just taking out the biggest mortgage a lender qualifies you to borrow, consider how much you want to pay each month for housing based on your financial and personal goals.

Think ahead to major life events and consider how those might influence your budget. Do you want to return to school for an advanced degree? Will a new child add day care to your monthly expenses? Does a relative plan to eventually live with you and contribute to the mortgage?

Still not sure how much you can afford? You can use the same formulas that most lenders use, or try another of these traditional methods for estimating the amount of mortgage you can afford.

1. The general rule of mortgage affordability
As a rule of thumb, you can typically afford a home priced two to three times your gross income. If you earn $100,000, you can typically afford a home between $200,000 and $300,000.

To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs of homeownership, like property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care costs.

2. Factor in your downpayment
How much money do you have for a downpayment? The higher your downpayment, the lower your monthly payments will be. If you put down at least 20% of the home’s cost, you may not have to get private mortgage insurance, which costs hundreds each month. That leaves more money for your mortgage payment.
The lower your downpayment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment.

3. Consider your overall debt
Lenders generally follow the 28/41 rule. Your monthly mortgage payments covering your home loan principal, interest, taxes, and insurance shouldn’t total more than 28% of your gross annual income. Your overall monthly payments for your mortgage plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 41% of your gross annual income.

Here’s how that works. If your gross annual income is $100,000, multiply by 28% and then divide by 12 months to arrive at a monthly mortgage payment of $2,333 or less. Next, check the total of all your monthly bills including your potential mortgage and make sure they don’t top 41%, or $3,416 in our example.

4. Use your rent as a mortgage guide
The tax benefits of homeownership generally allow you to afford a mortgage payment—including taxes and insurance—of about one-third more than your current rent payment without changing your lifestyle. So you can multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.

Here’s an example. If you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.

However, if you’re struggling to keep up with your rent, consider what amount would be comfortable and use that for the calcuation instead.

Also consider whether or not you’ll itemize your deductions. If you take the standard deduction, you can’t also deduct mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a “what if” tax return, can help you see your tax situation more clearly.

G.M. Filisko is an attorney and award-winning writer who’s owned her own home for more than 20 years. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.

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Appeal Your Property Tax Bill

Article From HouseLogic.com

By: Barbara Eisner Bayer
Published: October 08, 2009

To successfully appeal your property tax bill, you first need to do a bit of sleuthing into your real estate assessment.

Owning a home is an expensive proposition. There’s maintenance, landscaping, utilities, renovations, and, of course, taxes. It’s your civic duty to pay the latter, but it’s also your right not to yield a penny more than your fair share.

It’s possible to trim your property tax bill by appealing the assessed value of your home. But making a case against your real estate assessment, the basis for your property tax bill, requires doing a bit of homework. Initial research can be done online or by phone over two or three days, but the process can stretch out for months if you’re forced to file a formal appeal.

Read your assessment letter

A real estate assessment is conducted periodically by the local government to assign a value to your home for taxation purposes. An assessment isn’t the same as a private appraisal, and the assessed value of your home isn’t necessarily how much you could sell it for today. Real estate assessment letters are mailed to homeowners annually, or perhaps every two to three years, depending where you live.

The letter will include some information about your property, such as lot size or a legal description, as well as the assessed value of your house and land. Additional details-number of bedrooms, for example, or date of construction-can often be found in the property listing on your local government’s website. Your property tax bill will usually be calculated by multiplying your home’s assessed value by the local tax rate, which can vary from town to town.

If you think your home’s assessment is higher than it should be, challenge it immediately. The clock starts ticking as soon as the letter goes out. You generally have less than 30 days to respond, though the time frame varies not just between states, but within each state. Procedures are often outlined on the back of the letter.

Gather evidence

Start by making sure the assessment letter doesn’t contain any mistakes. Is the number of bathrooms accurate? Number of fireplaces? How about the size of the lot? There’s a big difference between “0.3 acres” and “3.0 acres.” If any facts are wrong, then you may have a quick and easy challenge on your hands.

Next, research your home’s value. Ask a real estate agent to find three to five comparable properties-”comps” in real estate jargon-that have sold recently. Alternatively, check a website like Zillow.com (http://www.zillow.com/) to find approximate values of comparable properties. The key is identifying properties that are very similar to your own in terms of size, style, condition, and location. If you’re willing to shell out between $350 and $600, you can hire a private appraiser to do the heavy lifting.

Once you identify comps, check the assessments on those properties. Most local governments maintain public databases. If yours doesn’t, seek help from an agent or ask neighbors to share tax information. If the assessments on your comps are lower, you can argue yours is too high. Even if the assessments are similar, if you can show that the “comparable” properties aren’t truly comparable, you may have a case for relief based on equity. Maybe your neighbor added an addition while you were still struggling to clean up storm damage. In that case, the properties are no longer equitable.

Present your case

Once you’re armed with your research, call your local assessor’s office. Most assessors are willing to discuss your assessment informally by phone. If not, or if you aren’t satisfied with the explanation, request a formal review. Pay attention to deadlines and procedures. There’s probably a form to fill out and specific instructions for supporting evidence. A typical review, which usually doesn’t require you to appear in person, can take anywhere from one to three months. Expect to receive a decision in writing.

If the review is unsuccessful, you can usually appeal the decision to an independent board, with or without the help of a lawyer. You may have to pay a modest filing fee, perhaps $10 to $25. If you end up before an appeals board, your challenge could stretch as long as a year, especially in large jurisdictions that have a high number of appeals. But homeowners do triumph. According to Guy Griscom, Assistant Chief Appraiser of the Harris County (Texas) Central Appraisal District, of the 288,800 protests filed in his Houston-area district in 2008, about 58% received reduced assessments.

How much effort you decide to put into a challenge depends on the stakes. The annual U.S. median property tax (http://www.taxfoundation.org/taxdata/show/1888.html) paid in 2008 was $1,897, or 0.96% of the median home value of $197,600. Lowering that assessed value by 15% would net savings of about $285. In some parts of New York and Texas, for example, where tax rates can approach 3% of a home’s value, potential savings are greater. Ditto for communities with home prices well above the U.S. median.

There are a few things to keep in mind as you weigh an appeal. The board can only lower your real estate assessment, not the rate at which you’re taxed. There’s also a chance, albeit slight, that your assessment could be raised, thus increasing your property taxes. A reduction in your assessment right before you put your house on the market could hurt the sale price. An easier route to savings might lie in determining if you qualify for property tax exemptions (http://www.houselogic.com/articles/common-property-tax-exemptions/) based on age, disability, military service, or other factors.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

Barbara Eisner Bayer has written about mortgages and personal finance for the past 15 years for Motley Fool, the Daily Plan-It, and Nurse Village, and is the former Managing Editor of Mortgageloan.com and Credit-land.com. She has successfully challenged her real estate assessment.

Reprinted from HouseLogic (houselogic.com) with permission of the NATIONAL ASSOCIATION OF REALTORS®
Copyright 2009. All rights reserved.

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