Let’s start with the price tag for your home. The simple rule of thumb is to spend less than three times your gross income. For example, if your household income is $67,000, your target home price is in the neighborhood of $200,000.
Next, how much have you saved or will you be able to save to put toward your home purchase? For a $200,000 home, a 20% down payment works out to $40,000. That’s a big chunk of change.
Some lenders allow down payments as little as 3% of the purchase price. Any amount less than 20% down will put you in a position that requires mortgage insurance (MI). MI protects the lender in the event you default on your loan. Let’s say you’ve saved $20,000. You could make a tidy 10% down payment on your $200,000 home purchase for a mortgage loan amount of $180,000.
Principal & interest payment
Financing with a typical 30-year, fixed rate loan would provide the lowest, stable monthly payment. As I write, interest rates for 30-year, fixed-rate mortgages are around 5%. For a $180,000 loan, the monthly principal and interest (P & I) payment on your loan would be $966.
See today’s mortgage rates.
In addition to principal and interest, your total monthly mortgage payment will also include taxes and insurance (PITI).
The average US homeowner pays about $2,197 in property taxes a year, $183 a month. See your state’s average property tax payment here.
Homeowners insurance protects homeowners from loss due to theft, fire or other disaster.
Homeowners pay an average of $1,083 a year – $90 a month – for this protection. See your state’s average annual homeowners insurance payment here.
The cost of mortgage insurance (MI) on a $180,000 fixed-rate loan – based on a 90% loan-to-value ratio, a credit score of 760, a monthly MI premium, 2 borrowers, a debt-to-income ratio of 35% and standard coverage required by Fannie Mae – is roughly $32 a month. (Since Readynest is brought to you by MGIC, I used MGIC rates to come up with this number.)
In many cases, MI is cancellable after your loan balance reaches 78%-80% of your property’s original value. Based on our example, you’d possibly be able to cancel after 6 years and 8 months, at which point your monthly mortgage payment would decrease by that amount.
All told, your monthly mortgage payment would be $1,271.