Understanding Loan to Value Ratios

When buying a home, it is helpful to determine the type of home you'll like and how much you can afford before beginning your search. Most lenders allocate approximately 28% of your GROSS MONTHLY INCOME to housing expenses including principal, interest, taxes and insurance (PITI). To get an idea of how much you can afford to pay each month for a home, multiply your gross monthly income by 28%.

When coupled with current outstanding loans, the total of your debt should not exceed 36% of your gross monthly income. Some loan programs (i.e. FHA) may have slightly more liberal requirements or loan interest rates which may increase your purchasing power.

Mortgage insurance, property taxes and loan fees, or "points," are currently tax deductible (upto allowable limits). Points are generally deductible in the year paid. A point equals 1% of the mortgage amount. If you are in the 28% tax bracket this is equivilent to receiving a 28% discount on your mortgage interest and property taxes. During the first years of the mortgage your tax savings are especially high because most of your monthly payment goes toward loan interest. 

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