Calculating Your Mortgage

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Monday, July 14th, 2008 Subscribe To Our Feed

Many people who are used to the finest in everyday items often get used to thinking that they can afford just about anything, anytime, anywhere. For some, this may be true. There is the old adage, “If you have to ask, you can’t afford it.” And that applies to an elite few who never have to ask, because they know they can afford it, whatever it is.

Many buyers in the high-end real estate market do use cash to pay for their homes, and this is a wise option if you can do so. Paying cash means no monthly interest payments to a bank, and the money you have leftover is making interest for you, not the lender. It also frees up your assets to be used in other ways, whether its investments, savings, or just the expenses of keeping up that multi-million dollar home.

For others, however, it does pay to take a step back and think seriously about something as hefty as a mortgage payment. It’s easy to get caught up in the look and feel of just the perfect house in the perfect neighborhood, with all the comforts and amenities you could imagine, without really thinking of how it’s going to actually hit your pocketbook and your budget, month after month. This is especially true when talking about residential homes that are in the range of $1 million or more, and unfortunately, in some areas such as Manhattan and Miami, home prices are continuing to rise rather than fall. In Manhattan in particular, $1 million just doesn’t get you what it used to; a modest two-bedroom apartment in a decent co-op can run you at least that much. Buyers in this market are surprised to find out that they really don’t have the cash they thought they did to purchase an apartment or co-op in that part of town, and so are shopping for a mortgage for the first time in their life.

So if you’re in the market for a new home, even in the high-end part of town, how can you go about reasonably figuring what type of mortgage payment you can afford on a regular basis? And can you really afford that ritzy apartment or condo in the heart of your favorite city, at least while having money left over for other things? There are some basic steps you can take and calculators you can use to get you there.

Getting your finances in order.

Some people who have always had money really and truly don’t know much about their own personal finances, and are very surprised when they actually sit down with their banker or financial advisor to find out about their income and assets.

Mortgage lenders will pre-qualify you to borrow up to a certain amount. This means that they will tell you in advance how much they will lend you for your mortgage, and you can use this number when shopping for that new home or apartment. Being pre-qualified also makes you a more attractive buyer, and places like high-end co-ops want to see that you are in a position to go through with the purchase of your property when considering your application for approval.

Make sure that everything in your financial history is correct, according to your financial advisor. Be familiar with everything they claim as an asset or liability. If you have other debts, you want to make sure you’re paying them on time, and this is accurately reflected. Yes, even those who are very wealthy have a history that is considered when it’s time to get a mortgage, so you need to make sure that history is completely accurate.

Amount you’ll be eligible for.

Despite what is in your financial portfolio, if you’re applying for a mortgage, there will be a cap on how much the bank or financial institution will loan you. Usually they consider that the monthly payment should be no more than 25% of your gross monthly income.

So suppose you have a career that pays $1 million per year. That’s $83,000 per month. Twenty-five percent of that is $20,750. This means that your monthly mortgage payment won’t be approved for any more than this amount.

How much can you buy?

If you’re paying around $20,000 per month in a mortgage payment, you can probably afford a home in the $3 million range.

This calculation takes into account not just the mortgage amount itself, but the interest rate on such a loan, taxes, fees, and costs such as this. Obviously this amount will adjust with the type of mortgage you’re looking for – if you want something shorter than a 30-year plan, you will of course be paying more per month for the same mortgage amount. Some mortgages are allowed to go for 40 years, but these are rare; however, this does mean a lower monthly payment for that same property.

Thinking of all the other expenses.

When considering getting a mortgage for the $3 million home, it’s easy to think that you should just simply go for it; you have that $20,000 per month and can afford it.

But you need to stop and think of all the other expenses that are attached to home’s of that size and value. What about co-op fees? Sometimes these are in the thousands of dollars every month. If you’re not living in Manhattan, chances are you need a car; are you paying a car payment, plus insurance, gas, maintenance, for that?

Have you figured in the cost of maintaining that home as well? If the home is quite large, what about gas needed to heat it in the winter, and the electric bill you’ll get every month as well?

If you need outside services to care for it – landscaping and lawn care, housekeeping, pool cleaning and maintenance – what about those expenses?

Are there additional expenses for the home that you haven’t taken into consideration, such as security or upgrades?

Check your lifestyle.

The bottom line is that if you’re looking for a mortgage for a multi-million dollar home because you don’t have the cash to pay for it, you need to make sure that your lifestyle supports your being able to live there in the long run. Chances are there are some changes that may need to be made before you sign the papers and get the keys.

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