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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
expense. Housing expense includes 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 for your debt
service should not exceed 36% of your gross monthly income. Some lenders
may have slightly more liberal requirements or loan interest rates which
may increase your purchasing power.
Mortgage interest, property taxes, loan fees or "points" are
currently tax deductible (up to 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 equivalent 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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