Prices of homes, even when they are affordable, are usually more than a buyer can afford to pay at once. Therefore, most homebuyers in New York and around the country purchase homes by borrowing a large portion of the cost of the home from a bank or other lender at the time of purchase. This is known as obtaining a mortgage loan, or, more commonly, "getting a mortgage." The terms and conditions of a mortgage loan will greatly affect the cost to you, and in some cases will determine whether or not you can afford to buy.
In obtaining a mortgage loan, the homebuyer receives a loan to cover the cost of the purchase price, and in exchange, pledges his home as the lender's security for repayment of the loan. Homebuyers repay these loans by making monthly payments to the lending institution. The monthly payments consist of both principal and interest amounts. The principal part of the payment counts toward repayment of the actual loan, while the interest part goes toward covering the interest charges (the fee the lending institution charges you for making the loan). The amount of the interest costs depends upon the interest rate attached to the loan at the time it is made. In addition, in New York State, property tax payments are usually included in the monthly payment amount, as are insurance costs. These four components of a mortgage payment are sometimes referred to as PITI, which stands for principal, interest, taxes and insurance. For more information about mortgages, skip ahead to Understanding Mortgages.
The actual purchase price of the home you can afford will vary depending on these components of your mortgage:
- The amount of your down payment;
- The amount of your monthly mortgage payment;
- The amount of your interest rate; and
- The length of your payment term.
Before looking seriously at specific properties, it is a good idea to have a lender pre-qualify you for a mortgage. A mortgage pre-qualification is a statement from a lender saying that a preliminary review of your finances shows you may qualify upon application for a specific loan amount. Getting pre-qualified for a mortgage before negotiating with brokers on specific properties will establish guidelines about what you can afford and will also give you more credibility in your dealings with sellers and their brokers.
To help you determine for yourself what type of property you can afford and how much of a loan you may qualify for, use a mortgage calculator. Many banks have mortgage calculators on their websites. The calculators can answer questions about how much you can afford, what your monthly payment will be and how the interest rate affects your monthly payment. You can find other charts in the What Can I Afford? section.
HPD's Guide to Homeownership