It is extremely important to calculate how much home loan you can afford to borrow in order to ensure smooth and timely payments as well as financial stability in the future. In order to do so you need to determine the following factors:
- Determine home ownership costs.
- Understanding tax benefits of homeownership.
- Accumulating and investing the down payment.
We will talk about, and explain each of these on the following few posts.
Lenders Cannot Tell You What You Can Afford
Many consumers who are looking to borrow a home loan get confused into thinking that what the home loan lender qualifies them for is the amount that they can actually afford to borrow and pay back. A lender cannot tell you what you can afford.
When a mortgage lender tells you that he can qualify you for a loan of $500,000, this does not necessarily mean that you can afford to spend that much on the home. What the lender is effectively trying to say is that based on what information he has seen regarding your finances, and the little or nothing that he knows about your other financial goals and plans, this is the amount that he thinks will be a prudent risk to lend to you.
In a nutshell, a lender does not know or even care about your other financial goals and interests. A lender does not know not really care whether you are falling behind in your other financial goals such as saving for retirement, saving for starting your own business one day, saving for a child’s marriage, college education or even paying for adequate personal insurance cover.
This is the main problem is taking for granted that the amount that a lender is willing to lend to you is the same that you can actually afford to borrow. People in all income levels, get into trouble by overextending themselves when they borrow more home loan than they can afford to pay back. Even people in the high income bracket can feel the financial strain and have to continue to working long hours and make other sacrifices such as spending limited time with family and children in order to meet the housing payments. When the personal finances of a person get stretched like this, it is fairly simple for a straw to break the camels back. Any kind of a incident that puts additional strain on the finances could result in the person losing their homes as well as their good credit standing.
At all points of time remember that just because a home loan lender or a real estate agent says that you are eligible and can qualify for a certain amount of loan, does not mean that you financially afford to borrow that much money and pay it back comfortably. Always figure in your other expenses, financial goals and obligations before calculating how much loan you can comfortably afford to borrow. Lenders do not tell you what you can afford to borrow they mostly only tell you the maximum that they will allow you to borrow. There is a lot of difference between the 2.