How Much Should I Borrow


If you've been to our mortgage qualifier calculator then you know the maximum amount that you qualify to borrow, but you shouldn't necessarily borrow the maximum. The most common mistake people make when buying a home is failing to consider their overall financial situation and needs.

If you fall in love with a home and buy it without looking at your monthly expenditures and long-term goals, you may end up with a home that dictates much of your future spending. For example, how much should you be saving monthly to reach your retirement goals? How much do you spend ( and want to continue spending) on fun stuff like travel and entertainment? If you would like to maintain your current lifestyle ( and the expenditures inherent in it), you have to be honest with yourself about how much you can really afford to spend to support a new house.

Consumer advocate Clark Howard suggests that you take the maximum amount that you qualify for, and reduce it by ten percent. This will give you the breathing room that you need in your budget.

Private mortgage insurance (PMI)

Another factor to consider in deciding how much you should borrow is that most lenders require you to purchase private mortage insurance (PMI) if your down payment is less than 20 percent. On a moderate-size loan, PMI can add hundreds of dollars per year to your payments.

If you have to take PMI to buy a home with less than 20 percent down, keep an eye on your home's value and your loan balance. With luck, your property will appreciate over time and your loan balance will decrease. Once the loan amounts to 80 percent or less of the market value of the home, you can get rid of the PMI. Removing PMI can be a costly hassle, because you must prove (with an appraisal) that you have at least 20 percent equity in the property.