December 07, 2001
By: Bev Dodd
Home loan rate: Flexible rates, easy terms
When you are deciding on your home loan rate, compare different rate/point combinations among lenders. Back end ratio requirements vary across the different types of loans, but a good rule of thumb is about a 38% total debt ratio for your home loan rate. We'll discuss this more below.
Mortgage lenders want to make certain that you can safely afford the monthly mortgage payment. They will calculate your monthly expenses (cars, credit cards, installment loans, student loans, etc.) and add the proposed new mortgage payment into that amount, then divide the total by your total gross monthly income. This ratio is known as your back end ratio: Monthly Expenses + Proposed Mortgage Payment (including taxes, homeowners association, insurance) \ by monthly income = Back End Ratio. Back end ratio requirements vary across the different types of loans, but a good rule of thumb is about a 38% total debt ratio for your home loan rate.
How much can I afford for a home loan rate? This is the most important question that people don't research, focusing on what their mortgage payments will be, ignoring other monthly payments. This oversight puts many people down the wrong path to bad debt. For example, your monthly expenditures will be more than just the home loan; there will also be homeowners insurance, flood insurance, mortgage insurance and utilities.
When you are deciding on your home loan rate, compare different rate/point combinations among lenders. You should first convert each quoted rate to one based on a constant number of points and then find the lender with the lowest rate. In making this conversion, consumers should use a traditional rule of thumb that equates each point to a 1/4 of 1 percent change in the interest rate. This would make an 8 percent loan with 0 points equivalent to a 7.75 percent loan with 1 point.
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