This is an excellent question and more people should do this kind of planning prior to making the leap into home ownership. There might be less foreclosures and bankruptcies as a result if people took the time to determine if they can afford to make the payments prior to purchasing a home.
Using these numbers and an interest rate of 6% with a 25 year term, the monthly payments would be
The interest rate and the 25 year term are negotiable with the banks. They could be lower or higher and affect the monthly payment accordingly. However this calculation provides this couple with a budgetary number for them to use in their planning.
As part of their financial planning, they should also include taxes. Although they did not include an estimate of the taxes with their questions we will assume $200 a month for taxes. Based on this assumption their monthly payments for principal, interest and taxes is $920. Which is only 15% of their monthly income. Most banks will approve mortgages that go up to 25% and some will approve high ratio mortgages that go higher. This couple is well inside the limits that the banks use.
There is also a cushion on the monthly payments should they decide to have a family and their income drops as a result or one of them gets laid off which is possible in this economy.
Most homes will require maintenance of some sort every year. There are upgrades that also will be completed as money is available. Our recommendation for this couple is to set aside some money for this purpose. Ensure it is available to them when they either need to replace such things as the roof, repave the driveway or other major maintenance items.
They should also have a 6 month savings plan available to handle emergencies. Sickness that prevents one of them from working or if they should receive a lay off notice. With the purchase of this home, at least from a financial perspective, this couple will be in a good position to deal with the financial issues that they may be faced with.
If you have questions about debt , loans or mortgages, please send us your questions and we will try to answer them for you during the following week. You can write your question in the comment field at the bottom of this post. For more information about mortgages, click here.
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