How do you calculate a mortgage you can afford?

When you feel you’re ready to buy a home, the very first thing to do is assess the kind of home you can afford to buy. The home you want at the beach or in a high-end commercial estate area would be expensive and probably out of your price range.

Zero in on the location, the type of house, the size of home and the price you can afford. So you need to sit down and calculate how much mortgage you can actually afford.

Most people save for a down payment and then contact the banks to get preapproved for a mortgage based on the earnings of the buyer. Obviously, the greater your down payment is, the smaller your mortgage is going to be. Banks have a set way of calculating your payment options based on your earnings minus your monthly liabilities. This is called the equated monthly installment or EMI. Today, you can go online and find a “Mortgage Calculator” which will calculate the monthly payments. You have to know the interest rate the bank is going to charge, the amortization (length of time you want the mortgage to run – i.e. 15 years, 20 or 30 years).

A general rule of thumb is that banks usually consider 1/3 of your earnings per month as the amount they believe you can dedicate to repaying a mortgage.

The granting of the loan also depends on other factors, such as your credit score and your total debt outside of your earnings and your history with the bank.