Post-Katrina Mortgage Calculations

So think through your mortgage decision because it's easy to get caught up in the game. Regardless of the low-rate loans out there, you're the one who has to make the monthly mortgage payments. Too many of us have pushed ourselves into more expensive homes because mortgage rates have been so historically low.

As an example, let's presume you've decided the maximum mortgage payment you can afford each month is $2,200 on a 30-year fixed loan. If rates were up near 8%, which they were not too long ago, with 20% down, you'd be able to borrow $300,000. So you'd be looking at a $375,000 home.

With 30-year fixed rates currently hovering around 6% you can now borrow $368,000 and keep your monthly payment at $2,200. Again, with 20% down, you're now looking at a $460,000 house.

Things get even more tempting when you start looking at alternative products like adjustable-rate mortgages (ARMs), a.k.a. a loan that has a fixed rate for only a few years but adjusts thereafter, or interest-only loans. These products allow you to push the envelope even further.

Remember, your mortgage payment consists of two pieces: principal and interest. In the beginning of the loan, a big chunk of your payment goes to interest. By paying the principal portion, you're paying down your loan in the hope of owing your home outright someday.

But if you take out an interest-only loan, you won't have to pay the principal portion of your loan -- only the interest piece is due each month. So while your monthly payment will be cheaper, you won't be building equity in your home.

Nevertheless, you could borrow more money with an interest-only loan and still keep your payment manageable. So with a 6% interest-only loan, you could borrow a whopping $440,000 and still keep your payment at $2,200. If you could scrape up the 20% down payment, you're now looking at a $550,000 house. Who are you, Donald Trump?