The Affordability Factor

How can you decide whether or not you can afford to buy a home? The biggest part of house affordability is the interest rate because it determines your monthly principal and interest payment. Let’s look at a $100,000 loan amount, a thirty-year fixed rate mortgage, interest rates, and monthly payments. The table below shows the difference the interest rate can make.

Loan Amount: $100,000 Thirty-Year Fixed-Rate Mortgage
Interest Rate	Payment
5.50%	$567.79
6.00%	$599.55
6.50%	$632.07
7.00%	$665.30
7.50%	$699.22

These figures do not include payments for property taxes and homeowners insurance, items that need to be considered as well. The four elements together–principal, interest, taxes, and insurance–make up your monthly house payment.

Let’s say the monthly homeowners insurance premium is $125.00 and the annual taxes, when spread over twelve months, equals $225.00 per month. That would mean, with a 6.50% interest rate, the total payment would be $982.07 ($632.07 + $125.00 + $225.00). There is a fifth element, mortgage insurance, which is required if a borrower puts down less than 20% toward the home purchase. Mortgage insurance protects the lender in the event a borrower defaults on the loan. A lender determines which type of mortgage insurance is required for the type of mortgage loan taken out by the borrower. The mortgage insurance payment is included in the total mortgage payment each month. For the first-time homebuyer especially, it is important to keep all these factors in mind.

After you figure your monthly payments, the down payment and closing costs are the second thing to consider to determine affordability. If you have never bought a home, it can be a very intimidating experience. You go out house hunting, you find the house that fits you, and then you start the process of buying the house. How much have you saved for a down payment? Most people think about that. They don’t, however, think about the closing costs, which also have to be paid at the beginning. These costs include fees to the bank or mortgage company; fees to the title/escrow company (the business that will take care of all the documentation and put the title and ownership in your name); and initial payments for taxes, insurance, and other things. As you can see, there are two parts to making sure your house is affordable for you, both when you buy the house and as you pay for the house.