When you are involved in refinancing an existing mortgage, determining how much you can really afford to pay for your home each month is a very important step. This will not only give you a loan amount to stick with, but it will also eliminate any last minute loan issues due to insufficient income levels.

Find out how much you can afford

How much can I pay for a house payment? It’s a question that clients often ask their mortgage brokers when applying for a new mortgage. Although it may seem like a mystery, it is actually quite simple to figure out.

The amount of housing you can actually afford to pay for is determined by a simple mathematical calculation known as the debt-to-income ratio, or DTI, as it is known in the mortgage industry. Your debt ratio is a percentage of your gross income (before taxes) compared to your monthly expenses. The calculation is that you divide your monthly bills by your gross income and that is your debt ratio. So if you have 1000 in bills and make 3000 a month your DTI would be 1000/3000 = .333 or 33%

A good debt ratio is around 42%. At this level you still have enough money left to live comfortably. Although some lenders will accept you with ratios up to 50% and sometimes over 50%, it is recommended that you refrain from borrowing up to this limit as it makes daily life a bit more difficult!

Not all of your expenses are used in the calculation of your debt ratio. The ones used are your revolving debts, such as mortgage payments, property tax payments, credit card payments, any loans you have, and store cards. What is not included are the expenses of daily living like food, gas and other items like the electricity or cable bill. So be sure to calculate these expenses so you don’t fall short each month.