Question: I am hoping that you can give me some insight on the difference between “50- year loans” versus “interest-only loans.” I am a soon-to-be single woman, and I am fearing that with the price of homes and even condos, I will only be able to afford to rent. I should get about $50,000 from the sale of the home we own now, but with my low take-home pay of only about $2,000 per month, I’m afraid that I won’t be able to get in to my own place.
Name withheld by request
Answer: This is a very difficult question to answer because there are so many variables that go into determining the maximum mortgage amount for which you can qualify.
Ten years ago, lenders used simple formulas to determine loan amount based on debt-to-income ratios. In those days, total debt payments typically could not exceed 36 percent of gross monthly income.
You did not say what your gross income is, but based on a take-home pay of $2,000 per month, I will assume that your gross income is approximately $2,500 per month.
Under the old loan qualifying rules, you could have qualified for about $900 per month in total debt, which would include your mortgage payments, car payments and credit cards.
Today, using sophisticated computer underwriting models, your debt-to-income ratio could be as high as 65 percent if you have excellent credit, a healthy savings account and other factors.
That means that you could have up to $1,625 per month in total debt if you were able to qualify at the maximum limit based on a $2,500 per month gross income
So you can see there is a range of possibilities, and it’s impossible to give you even a rough idea of what you could qualify for in a column like this.
Also, mortgage lending standards are tightening because of the collapse of the subprime mortgage market for borrowers who had poor credit.
But just to give you an idea, a $1,000 per month mortgage payment would give you about a $160,000 loan amount on a 30- year fixed rate mortgage at 6.25 percent. Assuming that property taxes and homeowner’s insurance would add about $250 per month on top of that, the total mortgage payment would be $1,250 per month.
That is for a traditional 30-year fixed-rate mortgage, which amortizes during the loan term so that it is totally paid off at the end of that term. If you chose an interest-only loan, you would reduce your monthly loan payment, but your loan principal balance would not decrease. The interest-only payment for the $160,000 loan example above would be $833 per month — plus property taxes and insurance.
Keep in mind that interest-only loans typically last for a maximum of 10 years, after which time you must begin paying down the principal.
Depending on where you choose to live, you may be able to find a house or condo that you can afford to buy, if you can qualify for a reasonably large loan amount.
I don’t think you should be afraid to rent for a couple of years because the housing market is soft, and I don’t expect home prices to increase during the next two or three years, or perhaps even longer. So take your time to make a decision. Don’t feel like you need to rush out a buy a new home right away.
Mail your questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
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