How Much is Enough?
When determining how big of a mortgage you need to take out, it is important to first know the maximum loan amount that is possible. If you have a Federal agency conforming loan (meaning your lender has adopted Fannie Mae, or some other Federal mortgage agency’s, standards as their own), you’re loan to value ratio may be as high as 97%. In this case, you are paying 3% as a down payment on your loan. This means that you will be paying mortgage insurance at least until 22% of the loan is paid off. Remember, if you want to avoid paying mortgage insurance, you must put up at least 20% of the payment as a down payment.
Federal regulations change each year regarding the maximum amount a borrower is able to take out depending on how many living units the house entails. For 2007, the going rates can be found here: http://www.i-mortgage-rates.com. As you may notice, the rates also differ depending on whether the mortgage is for a first home, a second home, or an investment.
It is possible to get a nonconforming loan. These loans are any type of loan that is over the Federal limit. These loans go up to about 107% of the property value.
According to W. Frazier Bell, there is a simple way to figure out how big of a loan to take out. First you take the amount you are able to safely handle as a monthly payment. As you will remember, this translates to roughly 28% of your monthly income. You divide this dollar amount by the factor for interest rate amortization per thousand dollars. Charts showing these numbers are available at your local realtor’s office or bank.
These two numbers will give you an estimate of how big of a loan you can afford to take out. Let’s say you can handle $1633.33 per month (this is roughly a $70,000 per year salary). If you take out a 15 year loan with an interest rate of 5.5%, you can afford to take out a mortgage of up to $200,000. Let’s take a quick look at the math behind this.
1633.33 / 8.1708 = 199.90
As you will notice, the factor for amortization on the loan is 8.1708.
For 30 year loans, the amortization factor is lower, thus allowing for higher loan amounts.
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