Ask the Expert: Financing Your Home with Citizens Bank

If you’re house-hunting, then “how much home can I afford?” (or “how much mortgage can I afford?”) is one of the first questions to address. To answer it, you’ll need to consider how much you can borrow and what monthly mortgage payment will comfortably fit into your budget when financing your home.

How do I know how much home I can afford?

How much you can borrow is based on mortgage qualification requirements, which vary by lender and loan program. In general, though, the factors that play a major role in determining whether you’ll qualify for a loan and how much you may be able to borrow are:

  • Debt-to-income (DTI) ratio. DTI equals your cumulative monthly debt payments— such as student loans, auto loans, and credit cards—divided by your total household income before taxes. Lenders may accept as much as 43 to 45 percent DTI, but less than 36 percent is ideal.
  • Credit history and credit score. A higher credit score represents less risk to the lender, making it easier to qualify for a mortgage with potentially better interest rates. Credit scores less than 660 are not as ideal, while scores 740 and above are better.
  • Employment history. Lenders want stability and prefer to see steady employment for at least the most recent two years—and an explanation for any gaps in your work history.
  • Savings. You should have sufficient liquid assets to cover the upfront costs of purchasing a home, plus a buffer equal to at least three months of mortgage payments (more may be required depending on the loan program). This is a safeguard in case you hit a financial bump after your purchase.
  • Down payment. A 20 percent down payment isn’t always required, but it can make it easier to get qualified. Plus, it means you can borrow less and won’t need to pay mortgage insurance, and that will lower your monthly payment.

Getting prequalified with a lender can give you a realistic idea of how much you may be able to borrow for your home purchase. However, you may qualify for a larger amount than you’re comfortable spending. It’s important to review your current budget to determine how much you have available for a mortgage payment each month.

Many experts recommend your mortgage payment be 28 percent or less of your gross monthly income—or 32 percent if you include other housing expenses, such as insurance, taxes and savings for maintenance and repairs. Remember that you may pay more for utilities and maintenance—especially if you’re moving to a larger property or going from renting to owning.

When should I consider paying discount points to get a lower rate?

If you’re shopping for a home and beginning to look at interest rates and mortgage options, chances are you’ll soon start wondering whether it makes sense to pay discount points.

Discount points are essentially interest that you prepay at closing to get a lower interest rate over the life of your mortgage . Typically, one point costs one percent of the total mortgage and lowers the rate by about 0.25 percent. So, on a $250,000 mortgage, one point would cost $2,500 and may lower the interest rate from, say, 3.5 percent to 3.25 percent.The cost to purchase points may be tax-deductible. (Consult your tax adviser.)

One of the keys to determining whether paying discount points makes sense is to figure out the break-even point. This is where the savings on your mortgage interest makes up for the cost of any discount points.After that, you’re truly saving money every month, which could add up to several thousand dollars over the full term of your mortgage.

There are sophisticated calculators available online to help you figure out the break-even point for various types of loans, but to get a rough calculation for a fixed-rate mortgage (one that doesn’t factor in investment rates and tax savings):

  • Calculate the difference between what your mortgage payment would be at an interest rate without discount points and what it would be at an interest rate with discount points.
  • Then divide the cost of the points by the savings difference between the two payments.

The bottom line is this: If you think you’ll stay in your home past the break-even point, then paying discount points could make financial sense.

For more helpful information on buying in New York City, view our Buyers Guide here.

Meet the Expert:

headshot financing your homeAce Watanasuparp
NMLS ID #483972
Vice President and Regional Manager, Metro NYC, Citizens Bank, Home Mortgage Division
ace.w@citizensbank.com | 917.859.6439

 

Mortgages are offered and originated by Citizens Bank, N.A. Citizens Bank is a brand name of Citizens Bank, N.A. (NMLS ID# 433960) and Citizens Bank of Pennsylvania (NMLS ID# 522615). Citizens Bank, N.A. and Citizens Bank of Pennsylvania are affiliates. All loans are subject to approval. Equal Housing Lender.

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