Fixed Rate Vs Adjustable Rate
A fixed rate is when your interest rate remains the same for your entire loan term. An adjustable rate stays the same for a predetermined length of time and then resets to a new interest rate on scheduled intervals. A5/1 ARM, for instance, offers a fixed interest rate for 5 years and then adjusts each year for the remaining length of the loan. Typically the first fixed period offers a low rate, making it beneficial if you plan to refinance or move before the first rate adjustment.
Formula For Calculating A Mortgage Payment
The mortgage payment calculation looks like this: M = P /
The variables are as follows:
M = monthly mortgage payment
P = the principal amount
i = your monthly interest rate. Your lender likely lists interest rates as an annual figure, so youll need to divide by 12, for each month of the year. So, if your rate is 5%, then the monthly rate will look like this: 0.05/12 = 0.004167.
n = the number of payments over the life of the loan. If you take out a 30-year fixed rate mortgage, this means: n = 30 years x 12 months per year, or 360 payments.
How Do You Calculate Your Home Affordability
There are several methods for figuring out your home affordability. The easiest way is to enter your information into our calculator. Our home affordability calculator works with either your debt-to-income ratio or your proposed housing budget.
For the first method, youll need your gross monthly income and monthly debts for the second, youll need your desired monthly payment amount. Both methods will require your down payment amount, state, credit rating, and home loan type.
Once youve input all the information according to the method you chose, our calculator will let you know the top amount you can pay for a house, as well as your estimated monthly payment.
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What Is Mortgage Pre
Pre-qualification is how lenders determine if you fit the basic financial criteria for a home loan.
To get pre-qualified, you tell a lender some basic information about your credit, debt, income, and assets, and it tells you how much you may be able to borrow. Tell is the key word here. The information used for pre-qualification is self-reported, which means the lender typically doesnt verify it or look at your credit report.
Considerations For Extra Payments
Pay Off Higher Interest Debts First
Paying off your mortgage early isn’t always a no-brainer. Though it can help many people save thousands of dollars, it’s not always the best way for most people to improve their finances.
Compare your potential savings to your other debts. For example, if you have , it makes more sense to pay it off before putting any extra money toward your mortgage that has only a 5 percent interest rate.
Further, unlike many other debts, mortgage debt can be deducted from income taxes for those who itemize their taxes.
Also consider what other investments you can make with the money that might give you a higher return. If you can make significantly more with an investment and have an emergency savings fund set aside, you can make a bigger financial impact investing than paying off your mortgage. It is worth noting volatilility is the price of admission for higher earning asset classes like equities & profits on equites can be taxed with either short-term or long-term capital gains taxes, so the hurdle rate for investments would be the interest rate on your mortgage plus the rate the investments are taxed at.
How Much House Can I Afford Calculator
Maximum Mortgage Payment
How Much House You Can AffordBased on a interest rate on a -year fixed mortgage.
As you can see from our calculator, how much house you can afford really depends on the relationship between your income and mortgage.
To figure out how much mortgage you can afford with your income, different lenders use different guidelinesbut most lenders dish out mortgages that are way too expensive and keep borrowers in debt for decades!
We want to help you buy a home thats a blessing, not a burden. And the only way to do that is to calculate your home-buying budget the smart wayand stick to it!
Thats what our calculator does for you. How does it work? Well show youget ready for some math!
Exercising Additional Payment Options
When you sign on for a 30-year mortgage, you know you’re in it for the long haul. You might not even think about trying to pay off your mortgage early. After all, what’s the point? Unless you’re doubling up on your payments every month, you aren’t going to make a significant impact on your bottom line right? You’ll still be paying off your loan for decades right?
Not necessarily. Even making small extra payments over time can shave years off your loan and save you thousands of dollars in interest, depending on the terms of your loan.
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How Much Mortgage Can I Get Approved For With A Poor Credit History
Your credit score plays a crucial role in the type of mortgage that you will be eligible for. This is because that score is what is used to predict how likely you are to repay your new mortgage loan. Your chances of getting a good mortgage value hinges on how good a credit score you have, so it is important to request a copy of your credit report and credit score about a couple of months before you start making your maximum mortgage calculations.
How A Larger Down Payment Impacts Monthly Payments*
*The payment is principal and interest only. To get the total monthly payment for down payments below 20%, add in your property taxes, homeowners insurance and private mortgage insurance .
In general, most homebuyers should aim to have 20% of their desired home price saved before applying for a mortgage. Being able to make a sizeable down payment improves your chances of qualifying for the best mortgage rates. Your credit score and income are two additional factors that will play a role in determining your mortgage rate.
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How We Make Money
Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or all available products.
Do Mortgage Calculators Require A Credit Check
No, our mortgage calculator simply uses the information you enter to calculate how much you might be eligible to borrow, along with the value of a home you could afford. You wont even be required to enter your name.
Only when you apply for a mortgage will you undergo a full credit check, which will be marked on your file and potentially impact your credit score.
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Be Conscious Of Changes In Employment
If you lose your job, how will you pay your mortgage? When you apply for a mortgage, your lender ideally will want to see a 2-year work history before they grant approval. If you choose to take the largest loan you qualify for, will you be able to make those higher monthly payments during a period of unemployment?
Talking To Only One Lender
First-time buyers often get a mortgage from the first lender or bank they talk to, and thats a big mistake. By not comparing offers, youre potentially leaving thousands of dollars on the table.
How this affects you: The more you shop around, the better basis for comparison youll have to ensure youre getting a good deal and the lowest rates possible.
What to do instead: Shop around with at least three different lenders, as well as a mortgage broker. Try to get rate quotes all in the same day, since rates change regularly. Compare rates, lender fees and loan terms. Dont discount customer service and lender responsiveness, either both play key roles in making the mortgage approval process run smoothly, especially now when many lenders are backed up with applications. Low interest rates have led to a mortgage application boom, and some lenders are more behind on closings than others. Bankrates mortgage rate tables are a great place to start comparison shopping.
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Always Enter A 0 For The Unknown Value
Note – You must enter a zero if you want a value calculated.
Because we want this calculator to create a payment schedule using the loan terms you need. The payment amount can be whatever you want it to be. A payment is “correct” as long as both the lender and debtor agree on the amount!
TIP – Use an amortization schedule to confirm the periodic interest charges. Interest amounts are the calculations that borrowers should be validating.
How Will My Debt
When you apply for a mortgage, lenders usually look at your debt-to-income ratio your total monthly debt payments divided by your gross monthly income written as a percentage.
Lenders often use the 28/36 rule as a sign of a healthy DTImeaning you wont spend more than 28% of your gross monthly income on mortgage payments and no more than 36% on total debt payments .
If your DTI ratio is higher than the 28/36 rule, some lenders will still be willing to approve you for financing. But theyll charge you higher interest rates and add extra fees like mortgage insurance to protect themselves in case you get in over your head and cant make mortgage payments.
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Being Careless With Credit
A mortgage lender will pull your credit report at preapproval to make sure things check out and again just before closing. Your lender wants to make sure nothing has changed in your financial profile.
How this affects you: Any new loans or credit card accounts on your credit report can jeopardize the closing and final loan approval. Buyers, especially first-timers, often learn this lesson the hard way.
What to do instead: Keep the status quo in your finances from preapproval to closing. Dont open new credit cards, close existing accounts, take out new loans or make large purchases on existing credit accounts in the months leading up to applying for a mortgage through closing day. Pay down your existing balances to below 30 percent of your available credit limit, if you can, and pay your bills on time and in full every month.
Making Decisions Based On Emotion
Buying a house is a major life milestone. Its a place where youll make memories, create a space thats truly yours and put down roots. Its easy to get too attached and make emotional decisions, so remember that youre also making one of the largest investments of your life, says Ralph DiBugnara, president of Home Qualified in New York City.
With this being a strong sellers market, a lot of first-time buyers are bidding over what they are comfortable with because it is taking them longer than usual to find homes, DiBugnara says.
How this affects you: Emotional decisions could lead to overpaying for a home and stretching yourself beyond your budget.
What to do instead:Have a budget and stick to it, DiBugnara says. Dont become emotionally attached to a home that is not yours.
Summary: Deciding How Much House You Can Afford
Ultimately, how much home you can afford depends on your financial situation and preferences. It requires a more comprehensive decision than just how much money you want to spend on mortgage payments each month.
Evaluate your full financial situation, your ability to pay off a mortgage and where you need to save for other things.
Once youve done all that, its time to go after that perfect home. Get started with Rocket Mortgage®.
Get approved to buy a home.
Rocket Mortgage® lets you get to house hunting sooner.
Your Savings And Investments
Now that youve looked at your DTI and any debt you may have, think about your budget. How does a mortgage payment fit in? If you dont have a budget, keep track of your income and expenses for a couple of months. You can create a personal budget spreadsheet or use any number of budgeting apps or online budgeting tools.
In the mortgage process, its important to look at your budget and savings for a couple of reasons. One, you might need savings for a down payment, which well discuss in a later section. However, for now, lets go over something called reserves. These may be required, depending on the type of loan youre getting.
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Know How Much You Own
Its crucial to understand how much of your home you actually own. Of course, you own the homebut until its paid off, your lender has a lien on the property, so its not yours free-and-clear. The value that you own, known as your “home equity,” is the homes market value minus any outstanding loan balance.
You might want to calculate your equity for several reasons.
- Your loan-to-value ratio is critical, because lenders look for a minimum ratio before approving loans. If you want to refinance or figure out how big your down payment needs to be on your next home, you need to know the LTV ratio.
- Your net worth is based on how much of your home you actually own. Having a one million-dollar home doesnt do you much good if you owe $999,000 on the property.
- You can borrow against your home using second mortgages and home equity lines of credit . Lenders often prefer an LTV below 80% to approve a loan, but some lenders go higher.
How The Loan You Choose Can Affect Affordability
The loan you choose can also affect how much home you can afford:
- FHA loan. Youll have the added expense of up-front mortgage insurance and monthly mortgage insurance premiums.
- VA loan. You wont have to put anything down and you wont have to pay for mortgage insurance, but you will have to pay a funding fee.
- Conventional loan. If you put down less than 20%, private mortgage insurance will take up part of your monthly budget.
- USDA loan. Both the upfront fee and the annual fee will detract from how much home you can afford.
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What Factors Help Determine ‘how Much House Can I Afford’
Key factors in calculating affordability are 1) your monthly income 2) cash reserves to cover your down payment and closing costs 3) your monthly expenses 4) your credit profile.
- Income Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
- Cash reserves This is the amount of money you have available to make a down payment and coverclosing costs. You can use your savings, investments or other sources.
- Debt and expenses Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
- Your credit score and the amount of debt you owe influence a lenders view of you as a borrower. Those factors will help determine how much money you can borrow and themortgage interest rateyoull earn.
For more information about home affordability, read about thetotal costs to consider when buying a home.
Printing The Payment Schedule
Printing will work from any type of device. It’s pretty cool to print a well-formatted schedule from a smartphone that is connected wirelessly to a modern printer.
Make sure you are printing from the “Print Preview…” window where there are two print buttons available.
If you are using a modern browser, you can print to a PDF as well. For example, if you are using Chrome, click on the menu and select “Print…” Click on the “Change…” button and select “Save as PDF.” Other browsers will work similarly.
If you have any problems, please let me know what browser and version you are using. I can test various browsers, but unfortunately, I can’t check too many printers .
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Consider The Cost Of Property Taxes
A monthly mortgage payment will often include property taxes, which are collected by the lender and then put into a specific account, commonly called an escrow or impound account. At the end of the year, the taxes are paid to the government on the homeowners’ behalf.
How much you owe in property taxes will depend on local tax rates and the value of the home. Just like income taxes, the amount the lender estimates the homeowner will need to pay could be more or less than the actual amount owed, which could result in a bill or a refund come tax season.
You can typically find your property tax rate on your local government’s website.
What Is The Average Interest Rate On A Mortgage
The average interest rate on a 30-year fixed-rate mortgage was 2.67% APR on Dec. 17, 2020. Thats the lowest average rate since at least 1971, the Federal Reserves earliest published rate. Mortgage rates have been falling more or less steadily since 1981, when average mortgage rates topped out at over 18% APR.