Factors that Affect How Much Mortgage you Can Afford

The two factors that affect how much mortgage you can afford are the length or term of the mortgage and whether your mortgage has a fixed or variable interest rate. Mortgages may range from 10-year to 30-year terms. The lists below show the most typical 15-year or 30-year terms.

15-Year Mortgage

• Borrow less money
• Build equity faster
• Less interest to pay
• Larger monthly payment
• Lower interest rate
• For example, if you borrowed $75,000 for 15 years at 7.5%, your monthly principal and interest payment would be $695.

30-Year Mortgage

• Borrow more money
• Build equity slower
• Can deduct more interest from income tax
• Lower monthly payment
• Higher interest rate
• For example, if you borrowed $75,000 for 30 years at 8%, your monthly principal and interest payment would be $550.

Whether your mortgage has a fixed or variable interest rate will also affect how much mortgage you can afford.

Fixed Rate Mortgage

• Interest rate stays the same for the term of the loan.
• Your payments are predictable and not affected by interest rate changes. 
• Interest rates could go down while you are locked into your mortgage at a higher than market rate.

Adjustable Rate Mortgage (ARM)

• Interest rates could go down while you are locked into your mortgage at a higher than market rate.
• You might have a low rate for an initial period of 1, 3, 5, 7, or 10 years.
• Monthly payments can be lower than fixed-rate loans. The interest rate and your payment can increase significantly throughout the term of the loan.