Mortgage: How Much Can I Borrow – Affordability

When most buyers start thinking about a mortgage, the wonder how much can I borrow? While the amount you can borrow on a mortgage is important, the affordability of the loan is more so.

The current real estate market as of March 2008 is a major mess. There are a host of reasons for this, but the issue of affordability in a mortgage is one that gets far to little play. In many ways, it shows why the mortgage industry was always going to end up in trouble.

Subprime mortgages get a lot of blame for the current down real estate market and rightly so. Another major problem, however, is the step up borrower. Literally millions of people are trying to step up from one value of home to a higher value of home thus building up the value of their equity and so on. It is a smart strategy…so long as the market is going up and you plan for a pullback. In short, the question is not how much can I borrow now, but how much can I afford to pay if things go bad?

Affordability is the basic issue here. The market has pulled back in a big way. Many people are having problems for two reasons. First, they increase in mortgage payments due to the end of teaser rate periods and increasing interest rates has resulted in mortgage payments they simply can’t afford. Second, the value of homes has pulled back to a point where many homeowners don’t have any equity in their home and cannot refinance out of bad loans.

This double whammy is just that – a financial whammy? Imagine being in a situation where you are struggling to make payments on a home that you owe more on then it is worth? Talk about a recipe for financial ruin!

Remember, there are some basic issues you need to consider when buying a home. First, what is the value now and what happens if it drops 10 to 20 percent? Second, keep in mind the question is not how much can I borrower or how much will the bank loan me? The true question is affordability – how much can I afford? Stick to this and you should be fine. Bite off more than you can chew, and you could really regret it.

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