June 23, 2017 | Posted in:

Ask Your CPA: How Much Mortgage Can I Afford?

In our current economy, if you have good credit, a steady job, and several thousand dollars for a down payment, you’ll likely find a financial institution willing to lend you money for a mortgage. Simply fill in the blanks in an online mortgage calculator to see a ballpark estimate of how much you may be qualified to borrow.

But online calculators don’t tell the whole story when it comes to mortgage affordability. Your new home purchase will affect your budget for the next 15 or 30 years, so it’s important to dig deeper. Scrutinize all the factors that could influence your home buying decision, some of which may be hard to quantify.

Above all, don’t sign a long-term mortgage contract until you’ve asked and answered the following two questions.

1) Should I save for a larger down payment?

You may find a house that sells for $200,000 and a lender who will let you make a 10 percent down payment. Under that scenario, you would owe $180,000 initially (disregarding closing costs and other fees). But let’s say you choose to wait and save enough cash to make a 20 percent down payment on the same home. Your initial mortgage balance would be $160,000. Comparing these two scenarios and assuming an annual interest rate of 4 percent on a 30-year mortgage, a larger down payment would mean a smaller principal and interest payment each month (about $95 less). In addition, you’d save over $14,000 in interest over the term of the loan and could avoid paying for private mortgage insurance (PMI), which is usually required for borrowers who cannot put 20 percent down. PMI fees vary from around 0.3 percent to about 1.5 percent of the original loan amount per year.

“If you’re thinking about buying a home, you should run some calculations to see how much money you’ll save by increasing your down payment,” advises Manager Ren Cicalese III, CPA, MST. “The more you put down, the less interest you’ll be paying in the long run. Current tax law allows an itemized deduction on the federal tax return for mortgage interest paid, but don’t worry about the deduction as much as cash flow savings.”

2) What percentage of my take home pay will be locked into house payments?

Remember, you’ll be making mortgage payments every month for years. With that in mind, try to limit your house payment (including taxes and insurance) to 25 percent of your take-home pay. Homes are expensive to maintain. You’ll need cash to cover utilities, maintenance, and repairs. Many Americans fall into the trap of being house rich and cash poor. They resort to credit cards and personal loans for all sorts of ongoing expenses: food, transportation, insurance, health care, and emergencies. Don’t make that mistake. Build room in your budget for house payments and the routine costs of living.

A third consideration that an online mortgage calculator won’t tell you is the impact on your taxes. Like most large financial decisions, it pays to have your CPA on your side.

“We can calculate your income tax savings by preparing a tax projection showing how much of your mortgage payment is applied to interest and real estate taxes, which are deductible,” adds Associate Partner Mike Engleman, CPA.

If you have questions about mortgage affordability, please don’t hesitate to call. →

© MC 2017 | “Financial Tips” are published monthly to provide useful financial information. The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. Visit for more information on managing your finances with a sound financial plan.


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