Mortgage Guide

Everything You Ever Wanted To Know About Mortgages

Conclusion: Should I Buy a Home?

You often hear people refer to their homes as investments. That's only half the truth. The primary purpose of a home is to shelter you. Yes, a house can be an investment, but the stock market demonstrates greater long-term returns.

Homeownership feels satisfying, and you get a tax break on the mortgage. But ownership is not all wine and roses. When the roof or water heater leaks, you have to shell out money for repairs. A renter who loses a job can move out and find a cheaper place; selling a home on short notice is a costlier and more complicated process.

There are options between renting and owning: seller financing, lease with option to buy, and contract for a deed. But regular homeownership is the most common option. The first thing to figure out is how much house you can afford. For most buyers, that's another way of saying that you've got to figure out how much you can afford to borrow.

In general, mortgage lenders want your monthly housing payment to be 28 percent or less of your monthly before-tax income. For this calculation, your monthly housing payment includes the principal and interest on the mortgage, plus property taxes, mortgage insurance and hazard insurance. Lenders call this your housing expense ratio or front-end ratio.

Lenders prefer that all of your monthly debt expenses not exceed 36 percent of your before-tax income. These debts include your mortgage-related payments; your auto loan, credit card and student loan minimum payments; your alimony and child support obligations and the homeowner association fees. Lenders call this your debt-to-income ratio or back-end ratio.

The recommended 28 percent housing expense ratio and the 36 percent debt-to-income ratio are general guidelines; some homeowners, especially low-income home buyers, can qualify for loans that allow higher ratios.

When you apply for a loan, you and the lender will need accurate estimates of how much you will pay every month for property taxes and homeowners insurance. In the next chapter, we will describe these and other key elements of the monthly mortgage payment.