When you read or hear about the calculation of monthly payments to buy a home, most times, the writer is using a 30-year, fixed-rate mortgage program to arrive at the payment amount. It's the most utilized program out there, thus, you'll see it used consistently.

The buying power affordability process starts something like this:

The mortgage professional will go through your monthly financials, starting with your income. Then he or she will go down your monthly installment payments on debt -- car loan, credit cards, student loans and any other mortgage or financed debt (not utilities, food or gas expenses, etc. -- unless, of course, you're paying for those items on a credit card).

Once he tabulates these numbers, he'll come up with a ratio -- how much monthly payment dollar against the level of income dollar. If you make $5,000 per month and your debt is $1,500, you would have a debt ratio of 30 percent (meaning 30 percent of your income goes toward monthly debt expenses).

Most loan programs will allow your monthly debt for a house to be 28 percent. When you add up all the other monthly payments, that ratio can rise to 36 percent without affecting your ability to borrow money. Nontraditionally, there are programs that lump all your debt into one lump sum number -- instead of a 28/36 program, they'll just say don't exceed 40 percent for everything. This gives the buyer a lot more flexibility when it comes to the cost of housing in an expensive area.

If you want to increase your buying power dramatically -- by almost 100 percent in some cases -- you should begin to look at nontraditional financing that includes lower, adjustable interest rates and even interest-only products.

To compare your buying power with these types of programs, you'll need to start with your budget. How much are you comfortable spending and what stays within the industry standard (for this demonstration only we'll use $1,000)?

Thus the stabilizing factor will be $1,000 for a principal and taxes payment, and I'll shift the other numbers. I'll also be using the interest rates found online within the last week.

1. 30-year, Fixed-Rate Mortgage, 6.12 percent

   $1,000 borrows $164,666.72

   This is the most popular loan program because it allows the most amount of money to be borrowed with the most stable payment budgetable.

2. 15-year, Fixed-Rate Mortgage, 5.47 percent

   $1,000 borrows $122,625.30

   As you can see, your buying power drops substantially, however, for the debt-averse buyer, it eliminates the mortgage in half the time required by a 30-year program.

3. 1-year Adjustable-Rate Mortgage, 3.74 percent

   $1,000 borrows $216,193

   Right now, this mortgage can really bump up your buying power, but you will lose the stability of the payment remaining the same year after year. The interest rate will adjust each year on the anniversary date of your mortgage.

4. 5/1 Adjustable-Rate Mortgage Interest-Only Payment, 4.87 percent

   $1,000 borrows $246,500

   This is not for the financially weak at heart. The interest-only loan means exactly that -- you're paying only interest on the $246,500 for the loan. This program should only be used in a marketplace where you are experiencing substantial and historically sustained equity growth. Otherwise, it could result in you being upside down in your loan (owing more than your house is worth). Nevertheless, some folks like it for the buying power it presents and they believe the equity growth in the sales market is enough to justify the program.

If you want to pump up your buying power as interest rates keep edging up with a growing economy, adjustable-rate mortgages and other low-interest-rate programs can do just that.

NOTE: For those who wrote me about finding a 40-year program -- talk with mortgage brokers, rather than bankers. The brokers will have more programs available and enable you to find the 40-year program.

Published: May 21, 2004

Use of this article without permission is a violation of federal copyright laws.

Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple. Got a personal real estate issue? Post your questions and comments at Anthony’s blog: commonsenserealestate.blogspot.com.