A mortgage is the largest insurance you will ever receive in your life. The mortgage has a term of no less than 15 years and no more than 30 years. To take on such a large debt, you need to be aware of your financial capabilities and future obligations.
Why would you want to know your annual profit to bear your home payments?
If you take out a mortgage, you need to make monthly installments for the next 15 or 30 years. In this case, your monthly profit should include a provision for the mortgage installment and other monthly expenses. Therefore, you should estimate your annual earnings and then get a mortgage that fits your budget.
How can this information help me work out how much I can take out as a mortgage for my home?
Simple economic theory states that your monthly mortgage payment, including principal and interest, should not exceed 25% of your total monthly income. Add to this real estate taxes and property insurance which adds another 3 to 6 percent. Besides, you have your food and other monthly expenses and federal taxes to pay.
We assume that you will pay a minimum of 20% down payment on the mortgage plus 2 to 5% in closing costs. Visit any mortgage website and they will give you an indicative cost per thousand dollars for a 15 year or 30 year mortgage with varying interest rates. So, if you end up buying a home for $150,000 and make a down payment of $30,000, then at 9% for a 30-year mortgage, your monthly payment using the numbers in the table provided comes to $8.05 per thousand. This means a monthly premium of $966 or $1,592 annually. Since we’re assuming that’s 25% of your total income, you need to earn at least $46,368 annually servicing this mortgage. Similarly, if you feel that you can get a bigger house, you can get a 15-year mortgage with a higher monthly installment. Furthermore, the equity on your 15-year mortgage accrues faster so you can refinance or move into a larger home.
How to Calculate Your Annual Income to Get an Affordable Mortgage
You can generally qualify for a mortgage equivalent to twice your annual income. However, lenders assess your net worth, liabilities, and costs of owning a new home before penalizing a mortgage.
Now let’s consider that your monthly expenses include mortgage payments, property taxes, insurance, and maintenance costs. You may need private mortgage insurance if the down payment is less than 20% of the mortgage amount. This is usually 0.5 to 1% of the mortgage amount and a monthly deduction. This security deposit may increase slightly over the years.
Next, calculate your assets including income, savings, pensions, and equity in real estate. Your obligations include auto insurances, monthly expenses, and credit card insurances. Your emergency funds should include savings that you can save for six months without any income.
Your net worth is your net assets minus your liabilities. Subtract the emergency funds from the net worth to get the amount available for lost costs and down payment. Next, get the sum of your annual expenses and operating costs minus your income. Then add the cost of rent and insurance to get an amount you can spend on your home in a year. Therefore, your annual income should be approximately twice that amount.
Advantage of using a mortgage calculator
As explained above, the calculations are detailed and you should not make any mistakes. So it is best to use the affordability calculators available on most financial websites to estimate your annual income.
Disadvantages of Not Using a Mortgage Calculator
You will end up buying a bigger house and then getting a huge mortgage that you cannot afford. You may default on your payments, which severely affects your credit rating. This will hamper your chances of getting credit in the future and affect your credibility among lenders.