Determine How Much Down Payment You Can Make
The next step in figuring out how much house you can afford is sizing up your down payment. The amount of money you put down on a home purchase directly affects the overall cost of your mortgage loan.
The more your down payment, the less youll have to borrow. With that in mind, most experts recommend 10% as a minimum down payment.
But to really reduce your monthly payments, you should aim for at least a 20% down payment. By doing that, you wont have to pay for private mortgage insurance, or PMI. Mortgage insurance is required by most lenders as a protection against you defaulting on the loan. It typically costs between 0.5% and 1% of your entire mortgage value, and its added onto your monthly payments.
You can request to have your PMI terminated once you reach a loan-to-value ratio at or below 80%, meaning you own at least 20% equity in your home and are less likely to default.
So by putting down at least 20%, you start out at that 80% threshold and never have to pay for PMI.
Heres how that can affect your monthly payment:
Lets say you put a 20% down payment on a $200,000 house. That leaves your total loan amount at $160,000. On a 15-year loan with a 3% interest rate, your monthly payment would be $1,105.
A 10% down payment would make your monthly payment $1,243 per month, plus at least another $67 a month for PMI, for a total of $1,310.
And nothing down at all would result in a $1,381 monthly payment, plus $67 for PMI. Total: $1,448.
Zillow Mortgage Calculator Equation
The traditional monthly mortgage payment calculation according to Zillows includes
- Principal: The amount of money you borrowed.
- Interest: The cost of the loan.
- Mortgage insurance: The mandatory insurance to protect your lenders investment of 80% or more of the homes value.
- Escrow: The monthly cost of property taxes, HOA dues, and homeowners insurance.
- Payments: Multiply the years of your loan by 12 months to calculate the total number of payments. A 30-year term is 360 payments .
What Is A Jumbo Loan
A jumbo loan is used when the mortgage exceeds the limit for Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy loans from banks. Jumbo loans can be beneficial for buyers looking to finance luxury homes or homes in areas with higher median sale prices. However, interest rates on jumbo loans are much higher because lenders don’t have the assurance that Fannie or Freddie will guarantee the purchase of the loans.
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Whats Behind The Numbers In Our How Much Can I Borrow Mortgage Calculator
When buying a home, the question How much can I borrow? should be the second question you ask. The most important consideration is, How much house can I afford? Thats because, even with all the angst involved in applying for and being approved for a home loan, lenders are often inclined to loan you more money than you expect.
Thats a surprising and important reality.
As much as you want to buy a home, lenders want to loan you money. And the bigger the loan, the happier they are. Youll know why when you see the estimate of the interest youll pay over the life of the loan. Its a really big number.
But if you know how much home you can afford, of course, youll want to learn how much you can borrow. The NerdWallet How much can I borrow? calculator can give you a solid estimate.
The calculator considers standard mortgage payment elements, such as principal and interest. Then, we take things a few steps further, factoring in taxes, insurance even homeowner association dues to help determine a real-life monthly payment.
We also examine your income and debt, just as a lender would, to determine the maximum home loan amount youre likely to qualify for.
Getting ready to buy a home? Well find you a highly rated lender in just a few minutes.
Enter your ZIP code to get started on a personalized lender match.
How Much Income Do I Need For A 200k Mortgage
With a $200,000 mortgage and a 3.5% down payment, you can save a lot of money. For a loan requiring a down payment of $10k and a 5-year interest rate of 5.5%, the applicant will need $54,729 in annual income. With our Mortgage Required Income Calculator, you can do even more calculations based on the parameters you specify.
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Most Affordable Markets For Homebuyers
According to 2020 data fromZillow Research, record low mortgage rates have helped to boost affordability for potential homeowners. The table below shows the top 10 most affordable markets to live in for December 2020 and is based on a typical home value of no more than $300,000 . The market and share of income spent on a mortgage may fluctuate based on the current mortgage rate, the typical local homeowner’s income and the typical local home value.
Get A More Accurate Estimate
Get pre-qualified by a lender to see an even more accurate estimate of your monthly mortgage payment.
How much house can you afford? Use our affordability calculator to estimate what you can comfortably spend on your new home.
Interested in refinancing your existing mortgage? Use our refinance calculator to see if refinancing makes sense for you.
- Dollar Sign
Your debt-to-income ratio helps determine if you would qualify for a mortgage. Use our DTI calculator to see if you’re in the right range.
- Award Ribbon VA mortgage calculator
Use our VA home loan calculator to estimate payments for a VA loan for qualifying veterans, active military, and military families.
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Fha Loans Va Loans And Usda Loans
In addition to the standard 30-year and 15-year loans, you might have other options.
FHA Loans: These are government-backed loans that might be an option for lower-income buyers or individuals with lower credit scores. FHA loans allow you to have a credit score as low as 500, and you can also make a down payment as low as 3.5%, making them attractive for first-time homebuyers.
VA Loans: These loans are available for military service members and veterans and are backed by the Department of Veteran Affairs. VA loans require no down payment or mortgage insurance. However, these loans do require a VA funding fee that changes annually.
USDA Loans: These loans are backed by the U.S. Department of Agriculture and are mainly for rural borrowers who cant qualify for traditional loans. No down payment is required, although there are income and property value limits.
How To Calculate Mortgage Payments
Zillow’s mortgage calculator gives you the opportunity to customize your mortgage details while making assumptions for fields you may not know quite yet. These autofill elements make the home loan calculator easy to use and can be updated at any point.
Remember, your monthly house payment includes more than just repaying the amount you borrowed to purchase the home. The “principal” is the amount you borrowed and have to pay back , and the interest is the amount the lender charges for lending you the money.
For most borrowers, the total monthly payment sent to your mortgage lender includes other costs, such as homeowner’s insurance and taxes. If you have anescrow account, you pay a set amount toward these additional expenses as part of your monthly mortgage payment, which also includes your principal and interest. Your mortgage lender typically holds the money in the escrow account until those insurance and tax bills are due, and then pays them on your behalf. If your loan requires other types of insurance like private mortgage insurance or homeowner’s association dues , these premiums may also be included in your total mortgage payment.
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How Much Is Homeowners Insurance And What Does It Cover
Homeowners insurance is a combination of two types of coverage:
- Property insurance: protects homeowners from a variety of potential threats such as weather-related damages, vandalism, and theft.
- Liability insurance: protects homeowners from lawsuits or claims filed by third parties for accidents that happen within the home.
In 2019, the average annual cost of homeowners insurance was $1,083 nationwide. The cost of homeowners insurance policy will vary depending on the type of property being insured and the amount of coverage the owner desires. Lenders require that buyers obtain homeowners insurance in order for the insurance premium to be included in the monthly mortgage payment.
How Much House Can I Afford With An Fha Loan
With a FHA loan, yourdebt-to-income limitsare typically based on a 31/43 rule of affordability. This means your monthly payments should be no more than 31% of your pre-tax income, and your monthly debts should be less than 43% of your pre-tax income. However, these limits can be higher under certain circumstances.
If you make $3,000 a month , your DTI with an FHA loan should be no more than $1,290 â which means you can afford a house with a monthly payment that is no more than $900 .
FHA loans typically allow for a lower down payment and credit score ifcertain requirementsare met. The lowest down payment is 3.5% for credit scores that are 580 or higher. If your credit score is between 500-579, you may still qualify for an FHA loan with a 10% down payment. Keep in mind that generally, the lower your credit score, the higher your interest rate will be, which may impact how much house you can afford.
FHA loans are restricted to a maximum loan size depending on the location of the property. Additionally, FHA loans require an upfront mortgage insurance premium to be paid as part of closing costs as well as an annual mortgage insurance premium included in your monthly mortgage payment â both of which may impact your affordability.
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How Can I Qualify To Borrow More
If youre disappointed by the how much can I borrow results, remember that there are many factors at work. Small improvements in one or more can make a substantial difference:
A bigger down payment always helps. The more money you put down, the better youll look in the eyes of the lender.
Be a tactical buyer. If school districts wont play a role in your family for years, consider finding a home in a transitioning neighborhood maybe buying a starter home rather than a forever home. Youll likely get a better home value and wont need to borrow as much.
Reduce debt even a little. Paying off or down a credit card or two can help in several ways. Your debt-to-income ratio will go down and you may even get a nice bump in your credit score.
Increasing Mortgage Payments Are Outpacing Rent Hikes
Although Zillow data shows that monthly mortgage payments remain considerably lower than the observed market rate rent, housing costs are rising more rapidly for homebuyers than they are for renters. Rents rose 16.8% annually in March to $1,904, while mortgage payments rose 38% during the same period.
But despite rising mortgage payments, buying a home comes with an important financial advantage over renting. While rents tend to increase with inflation every time a tenant renews their lease, monthly mortgage payments are locked throughout the loan term. Plus, the principal of a borrower’s mortgage payments go directly into their home equity which is also on the rise as home values continue to soar.
If you’re thinking about buying a home to offset rental inflation, it’s important to compare rates across multiple lenders. You can browse current mortgage rates in the table below, and visit Credible to see free offers without impacting your credit score.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at and your question might be answered by Credible in our Money Expert column.
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How Much Mortgage Can I Qualify For
Lenders have apre-qualification processthat takes your finances into account to determine how much they are willing to lend you. Once the lender has completed a preliminary review, they generally provide a pre-qualification letter that states how much mortgage you qualify for. Get pre-qualified by a lender toconfirm your affordability.
Documents Needed For Mortgage Application
Here are a few documents you should gather to help you understand your financial situation and how much house you can afford. This information will also be required when you apply for a pre-approved home loan.
- Recent statements from all bank and investment accounts
- Pay stubs and W-2 income tax forms
- Total monthly expenses, including all bills, groceries, clothing budgets, etc.
- All of your assets, including stocks, 401, IRAs, bonds, cash, rental properties, etc.
- All debt including credit cards, student loans, car loans, mortgages, etc.
- Profit and loss statements if you are self-employed
- Gift letters if you are using a gift to help with your down payment
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How To Lower Your Monthly Mortgage Payment
- Choose a longer loan. With a longer term, your payment will be lower .
- Spend less on the home. Borrowing less translates to a smaller monthly mortgage payment.
- Avoid PMI. A down payment of 20 percent or more gets you off the hook for private mortgage insurance .
- Shop for a lower interest rate. Be aware, though, that some super-low rates require you to pay points, an upfront cost.
- Make a bigger down payment. This is another way to reduce the size of the loan.
S To Expect During The Mortgage Process
So youve decided to buy a new home congratulations!
Youre probably feeling a lot of emotions right now. Elation. Anxiety. And possibly confusion. You may wonder whats going to happen next. Or worry that if you forget to send a document or make a call, youll derail the process.
First of all, relax. Most likely, youre surrounded by professionals whove been through this before. But just in case youre looking for backup, weve assembled the steps you can typically expect and what youll need to do. Whether youre at the start of this journey, or nearing its end, we hope this guide will help you feel ready and at ease.
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How To Use Our Mortgage Payment Calculator
The first step to determining what youll pay each month is providing background information about your prospective home and mortgage. There are three fields to fill in: home price, down payment and mortgage interest rate. In the dropdown box, choose your loan term. Dont worry if you dont have exact numbers to work with – use your best guess. The numbers can always be adjusted later.
For a more detailed monthly payment calculation, click the dropdown for Taxes, Insurance & HOA Fees. Here, you can fill out the home location, annual property taxes, annual homeowners insurance and monthly HOA or condo fees, if applicable.
How Much Of A Down Payment Do You Need For A House
A 20% down payment is standard, if you can afford it. Though some mortgage loans may only require as little as 3.5 percent down, or none at all, a larger down payment will have a greater impact on your monthly mortgage payment.Your down payment effectively reduces the total amount of your home loan, which increases your home affordability estimate, and at the same time, decreases your mortgage payment each month. For example, below is a chart showing how a certain level of down payments, based on a percentage of the sale price, directly impacts your monthly mortgage payment :
List out your expenses and then add them together to get your total monthly spending.
‘the Novelty Of That New Home Will Wear Off The Mortgage Payments Do Not’
Going above budget to buy a home is a common mistake a lot of would-be buyers make when the market is hot, and that choicecan be very costly, McBride says.
“There are going to be a million temptations to stretch beyond because of limited inventory and competition,” he says, “But remember this: The novelty of that new home will wear off the mortgage payments do not.”
The common wisdom says that you should follow the 28/36 rule when it comes to planning your monthly mortgage payment, which says you should spend no more than 28% of your monthly gross, or pre-tax, income go toward housing costs and no more than 36% go toward total debts .
Using a housing budget calculator to estimate what that all in number should be is a good idea, McBride says.
The Difference Between Adjustable And Fixed Rates
When you shop for a mortgage loan, youll find several different types. Heres what to look for in fixed and adjustable rate loans as you determine how much house you can afford:
Fixed Rate: With a fixed-rate loan, interest rates are locked in. If it starts at 4.5%, it will always be 4.5%. For homebuyers, this means that if you can get a fixed-rate mortgage when rates are low, youll pay less overall. This is the best option in most cases.
Adjustable rate: If you opt for an adjustable-rate mortgage, then after a set period of time with a fixed rate, your interest rate can change if the market does. There are very few situations in which this is a better option than a fixed-rate loan.
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