Finance
Mortgage Calculator: How Much House Can I Afford?
A mortgage calculator is an online tool that helps you estimate the monthly mortgage payment you can afford based on your income, expenses, down payment, and other factors. Here are the steps to use a mortgage calculator to determine how much house you can afford:
- Determine your monthly income: Calculate your gross monthly income, which includes your salary, bonuses, overtime, and other sources of income.
- Calculate your monthly debt payments: Add up your monthly debt payments, including credit cards, car loans, student loans, and other debt.
- Determine your down payment: Decide how much you can afford to put down on your new home.
- Know the interest rate: Check the current mortgage interest rate in the area you are looking to buy the house.
- Use a mortgage calculator: Input the above details into a mortgage calculator, along with other factors such as the term of the loan and property taxes. The calculator will give you an estimate of the monthly mortgage payment you can afford.
Keep in mind that most lenders will require you to have a debt-to-income ratio of 36% or lower to qualify for a mortgage. Also, don’t forget to factor in other expenses like home insurance, maintenance costs, and utilities when calculating how much house you can afford.
It is best to consult with a financial advisor or work with a reputable mortgage lender to get a better understanding of your financial situation and how much house you can afford.
Mortgage Calculator: How Much House Can I Afford?
Step 1: Determine Your Monthly Income
Write down your monthly salary after taxes, then add any other income that is included in the household’s total monthly income (income from investments or rental properties, etc). Subtract the total of all the monthly expenses in your household. The number left over is how much you have to spend for housing each month.
For example, if you bring home $3,000 a month after taxes, and your other monthly expenses are $1,200 ($500 car payment plus utilities plus groceries), then you have $1,800 left over to put toward a house payment each month. This would be written as: income = $3,000; expenses -$1,200; which would equal $1,800 available for housing.
Step 2: Determine Your Down Payment
If it’s possible on your budget and on the terms of the loan that you’re working with (and assuming that your credit history is good), make sure your down payment on the house is enough to avoid paying for private mortgage insurance (PMI).
The general rule of thumb when it comes to determining how much you should spend on a house, including your down payment, is that the total monthly housing expense should not exceed 28% of your pre-tax income. This includes mortgage payments with taxes and insurance included in the monthly cost. Mortgage insurance premiums are added into this figure as well.
Step 3: Determine How Much House You Can Afford With The 28% Rule
Take your monthly available income from Step 1 ($1,800) and multiply by 0.28 ($458). That would be the maximum amount you could afford for a house payment. The $458 would go toward the house payment, taxes and insurance each month.
Step 4: Use A Mortgage Calculator
To determine how much you can afford monthly for a home then use an online mortgage calculator to find out how large of loan you qualify for. You will need your pre-tax income (from Step 1) and the down payment amount (from Step 2) they should be entered into any mortgage calculator like this one . It’s possible that with lower interest rates or larger down payments, you may qualify for a larger loan.
You may want to avoid thinking about financing more than you can afford, which is why it’s important to budget carefully before buying a house (see our recent post on How Much House You Can Afford ). And remember, a mortgage calculator can likely only provide an estimate of what you qualify for. A loan officer will run your credit and determine your interest rate based on other factors, which may affect how much house you ultimately get.
The Benefits of Mortgage Calculator
A mortgage calculator can help you determine how much house you can afford. Use a calculator to estimate different loan amounts and compare the payment too with your budget so you can find the right house.
The benefits of a mortgage calculator are that you can determine payment amounts based on different interest rates and payment lengths. This will give you an idea of the monthly payments so that you can narrow your search for a house. You can also see how much house you can afford based on the 28% rule by using this mortgage calculator .
You may be thinking, “I just want to know what my payment will be.” If that’s all, then go with the calculator that only asks for two variables: loan amount and interest rate. These are commonly known as payment calculators or loan affordability calculators.
Many online calculators such as this one will show an amortization schedule if you scroll down past the primary “get started” information. The amortization table shows how your principal is gradually paid down over time while interest is added onto it. Once the principal is paid off, only interest will be added to the payment.
Mortgage Calculator for Mortgage Refinancing
A mortgage calculator can also help you determine your monthly payment (and thus how much house you can afford) if you’re doing a refinance and don’t want to change the term or amount of the loan. By keeping this information constant, we can then adjust the rate until we reach our target payment. You would enter in your current balance on a mortgage calculator like this one.
Then add in your monthly expenses from Step 1 above so that you have all of your available income going toward housing costs. The total number of months should correspond with how long it will take you to pay off any current loan.
You would also input any fees associated with refinancing into the Other Monthly Expenses box, as well as a 3% interest rate for your refinance. This calculator will show how much you can borrow and what your new monthly payment will be after any closing costs are paid off.
Other Fees to Consider
In addition to all closing costs, or points (fees), there may be other expenses that come up during the process of getting a mortgage. These include notary fees, title insurance, property taxes and homeowners insurance.
Your bank should have a list of standard fees they have charged in the past that you can use as a reference when going through this process yourself. Review before scheduling an appointment with a loan officer of any additional fees that you may have to pay.
Interest Rates and the Mortgage Calculator
Currently, interest rates are at historic lows right now, which can make it difficult for a mortgage calculator to predict your monthly payment accurately. In addition, an increase in the numbers of people who are trying to refinance or obtain a new loan can increase competition among lenders and drive down interest rates even further.
When interest rates are lower, you will be able to afford more house with a given amount of income. For example, if you were going to buy a $200,000 house last year but only had enough money saved up for a 20% down payment ($40,000), then using today’s interest rate would give you a monthly payment of $909.29 based off this calculator.
But if you had the $40,000 to put down last year, your interest rate would be much lower and give you a monthly mortgage payment amount over $200 less.
The simplest way to use the mortgage calculator is by putting in how much money you have saved for your down-payment as well as how big of a loan you are getting (the size). From there, it will calculate how long it will take for you to pay off that loan with the number of payments listed on the right side.
The total cost will also be shown at the bottom. You can then play around with different variables such as term length or down payment percentage to see what kind of results you get.
It is important to understand that the calculations are based on rates currently being offered, so the figures are only relevant for use today. Additionally, if you are taking out an adjustable-rate mortgage, it is not advisable to simply take the lowest possible payment option.
Although these often have low introductory rates, they do not provide any protection later on should interest rates rise substantially in the future. If you have a fixed-rate mortgage instead of an adjustable one or hold your current loan until it expires before refinancing into another fixed rate loan, then you will be able to know exactly what your monthly payments will be in advance.
Another thing to keep in mind when using this calculator is how much home you can afford based on your income. This is the amount that you can borrow when using this calculator and assumes that you meet all of the lender’s criteria for such a loan ( i.e., debt-to-income ratio).
So if your monthly expenses add up to $1,800 but you only have enough money saved for a 5% down payment on a home that will cost around $400,000 then it may not be wise to purchase an expensive house since it would throw off your budget.
Getting Rid of Existing Debt
If you are looking to refinance or get a new mortgage because of high interest rates on existing mortgages or credit card balances, try paying those loans off first so they don’t remain as financial burdens.
Otherwise, you will end up paying a lot of money in interest payments as well as high monthly payments because you own multiple loans. So if you have three credit cards, for instance, and each one has a balance of $10,000 with 18% interest rates attached, then try to make extra payments on those cards instead of putting all of your monthly savings toward a new house until those cards are paid off.
Typically, the best way to make extra payments is by trying to put that money into an interest-bearing account so that it earns at least some form of return while still being readily available when you need it. If you have enough excess income every month after all other bills are paid to be able focus on paying off debts, then do so.
Purchasing a House with Multiple Loans
For example, if you are looking for a house that costs $400,000 and have saved up $100,000 for the down payment plus another $10,000 as well as closing costs (another 2-3% typically), then you would only need about six or seven separate loans at those rates in order to afford such a purchase.
Of course, this is unrealistic (and extremely difficult to obtain) since it would require tying up all of your available cash in equity and leaving little left over for actually living off of.
Capitalizing on Tax Deductions
Before you go about purchasing a home, try to understand all of the tax-deductions that are available so that you can make an informed decision. For instance, if your interest rate is near 4% once itemized deductions are taken out, then it is better for you to purchase a more expensive house with low monthly payments rather than invest in something else since the return on investment will not be as good due to the deduction of mortgage interests.
Also consider operating expenses such as maintenance and insurance costs before deciding which home would be best for you because they may end up costing just as much every year as your mortgage payment would.
Rent or Buy?
You should consider whether it is better to rent a house or buy one. Generally speaking, renting a home is cheaper if you only plan on living in the same location for a few years since there are no major repair expenses and you can usually break your lease with little notice. However, buying would be better if you want to settle down somewhere for at least five years so that you can accumulate equity more quickly.
What Kind of Mortgage Is Best?
Depending on what your plans are during the next few years, it may be wise to get either an adjustable rate mortgage (ARM) or fixed-rate mortgage (FRM). Since interest rates change constantly based on market conditions, this calculator will provide monthly payments using the current rate attached to each type of mortgage to help you figure out which one is best for your financial situation.
Remember, when it comes to mortgages and other types of debt, the best way to get ahead in life is by not accruing interest expenses in the first place. So if at all possible, try to pay off any existing loans or refrain from taking on any additional ones until you can afford them without having a major impact on your monthly budget.
Also be sure that you are aware of what closing costs are attached with purchasing a house so that they don’t astonish you once everything has been signed. This calculator will show average closing costs within your state so that there are no surprises when it comes time for this final before moving into your new home.
Disclaimer: This calculator is provided for illustrative purposes only. We cannot and do not guarantee its applicability or accuracy in regards to your personal financial situation nor do we claim that the results are representative of any specific investment product. For more information, please consult with a qualified professional.
Further Reading:
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How to Increase Brand Loyalty? 10 Ways to Keep Your Customers Coming Back
10 Tips for Hiring Family Members at Your Small Business
Sources used:
http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx
http://www.investopedia.com/ask/answers/101419/what-are-closing-costs-when-buying-home.asp
