As I mentioned earlier, we are in the process of refinancing our mortgage to take advantage of the record low rate. We have heard back from our broker and there is good news and bad news. The good news is we have locked in a rate that’s much lower than our current rate of 4.25% APR, so we can save some money on monthly payment The bad news is that the rate was locked in on Monday and we could only get 3.875%, not the 3.75% I had hoped for With this rate, the monthly bill will be lowered by less than $80, which probably won’t make any big difference. However, since the refi won’t cost us anything (the broker even reimburse the $20 charged to check our credit scores), whatever the amount saved is our pure gain. So even it’s a small money, we will happily take it.

Because this is a refinancing, it doesn’t involve any recalculation of how much loan we can afford. We are basically just going to replace our current mortgage with a new one with a lower rate (though we are hoping to borrow slightly more than the current balance). But back in March, actually at the time when we started searching, it did take us some time to figure out the price range of house we can afford and how much mortgage we can handle. On one hand, we wanted a house big enough for our family of four; while on the other hand, we didn’t want to borrow too much to put us under too much of stress, even though we might well qualify for a larger loan.

Here are what we considered when we went through the process of deciding how much mortgage we can afford.

First, we looked what we spent on and how much each month. At the time when we started house hunting, we have already sold our house in New Jersey, so we didn’t have any other liability. Even though our overall monthly spending was quite high (the number was based on how we spent our money in 2009), the debt-to-income ratio was still low, which was a good thing in the eyes of a lender, because we didn’t have any *debt*. But having a low debt-to-income ratio doesn’t mean that we want to borrow a lot of money to buy a big, fancy house, even though we could, because we still have to pay daycare, which is a big portion of our monthly expenses, and buy foods. The lender may not consider these expenses when evaluating our mortgage application, but we had to. After all, it will all come out of our pay checks.

Once we had a clear picture of how much we usually spent every month, we then added monthly mortgage payment on top of that to see where we might be at the end of the month. Based on different scenarios, such as the loan term, total amounts and different interest rates, the monthly payment could vary a lot, with the difference going from hundreds to over a thousand dollars (many real estate websites, like those we used in our house hunting, have mortgage calculators, so figuring out monthly payment was quite easy). Our thought back then was putting as much down payment as possible,  so we could borrow less. With the proceeds from selling our house in NJ and our savings in the past couple of years, we didn’t have much problem making at least 20% down payment. The next question was deciding the amount of money to borrow so we could be comfortable owning the house we like and paying the bill.

Of course, the monthly housing payment contains more than just the mortgage. There are also property taxes, home insurance premium, and homeowner association fee.  These fees are not included in any mortgage calculator, but they have to be considered because they could add hundreds of dollars or more to the overall monthly housing payment, not something that we could forget about.

At the end, when adding up the mortgage payment, property taxes and association fee, and all our usual expenses, we wanted the total number to stay below our take-home income with a good margin. Since we might need to use all of the money we have saved for down payment and home improvements, it wouldn’t be wise to not to leave any room. Unexpected things could happen. And when they do happen, we want to have options to deal with them. After all, we don’t want to live above our means

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