More Frequent Payments Could Help You Pay Off Your Mortgage Faster
You can pick weekly, bi-weekly and monthly payments, depending on the lender. More frequent payments will mean youll pay less interest over the life of the mortgage with the same interest rate.
You can also opt for accelerated payments that shave time off your total amortization period. While giving your lender payments a few days earlier doesnt save much interest, accelerated payments can increase the total payments you make each year helping you pay off your mortgage faster.
If you value simplicity, increase your total annual payments but add them up and divide by 12 to compute the equivalent monthly payment.
- Footnote 1
- 1 Moshe A. Milevsky, Mortgage Financing: Floating Your Way to Prosperity, The Individual Finance and Insurance Decisions Centre, March 2001.
Next: See How Much You Can Borrow
You’ve estimated your affordability, now get pre-qualified by a lender to find out just how much you can borrow.
What will your new home cost? Estimate your monthly mortgage payment with our easy-to-use mortgage calculator.
- Award Ribbon
Use our VA home loan calculator to estimate payments for a VA loan for qualifying veterans, active military, and military families.
- 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.
- Pig Refinance calculator
Interested in refinancing your existing mortgage? Use our refinance calculator to see if refinancing makes sense for you.
How Much Should I Have Saved When Buying A Home
Lenders generally want to know you will have a cash reserve remaining after youâve purchased your home and moved in, so you donât want to empty your savings account on a down payment.
Having some money in the bank after you buy is a great way to help ensure that youâre not in danger of default and foreclosure. Itâs the buffer that shows mortgage lenders you can cover upcoming mortgage payments even if your financial situation changes.
While maintaining a debt-to-income ratio under 36% protects you from minor changes in your finances, a cash reserve protects against major ones.
At a minimum, itâs a good idea to be able to make three monthsâ worth of housing payments out of your reserve, but something like six months would be even better. That way, if you experience a loss of income and need to find a new job, or if you decide to sell your house, you have plenty of time to do so without missing any payments.
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How Much House Can I Afford
While you may have heard of using the 28/36 rule to calculate affordability, the correctDTI ratiothat lenders will use to assess how much house you can afford is 36/43. This ratio says that your monthly mortgage costs should be no more than 36% of your gross monthly income, and your total monthly debt should be no more than 43% of your pre-tax income.
For example, if you make $3,000 a month , you can afford a mortgage with a monthly payment no higher than $1,080 . Your total household expense should not exceed $1,290 a month .
The 28/36 Rule For Affordability
One dependable guideline that moneylenders may use to survey the amount of a home loan you fit the bill for is the 28/36 standard. This standard says that your home loan installment should be close to 28% of your pre-charge pay, and your all out obligation should be close to 36% of your pre-charge pay. While these numbers are utilized as a guide by numerous moneylenders, there are a few situations where you might have the option to have a higher number. For instance, a few loan specialists may permit borrowers with a higher FICO assessment to have marginally higher DTI proportions. Also, a few advances take into account higher DTIs, for example, FHA credits, which permit up to 43% or higher sometimes.
How Much House Can I Afford With A Va Loan
Veterans and active military may qualify for a VA loan, if certain criteria is met. While VA loans require a single upfront funding fee as part of the closing costs, the loan program offers attractive and flexibleloan benefits, such as noprivate mortgage insurance premiums and no down payment requirements. VA loan benefits are what make house affordability possible for those who might otherwise not be able to afford a mortgage.
With VA loans, your monthly mortgage payment and recurring monthly debt combined should not exceed 41%. So if you make $3,000 a month , you can afford a house with monthly payments around $1,230 .
Use ourVA home loan calculatorto estimate how expensive of a house you can afford.
How To Determine How Much House You Can Afford
Your housing budget will be determined partly by the terms of your mortgage, so in addition to doing an accurate calculation of your existing expenses, its important to get an accurate picture of your loan terms and shop around to different lenders to find the best offer.
Mortgage interest rates are near all-time lows right now, which has made borrowing easier for many buyers. Unfortunately those low rates, coupled with limited available listings, have pushed prices up to record highs. But, if your budget works out, it can still be a great time to buy. Here are some of the factors that can affect your loan terms, which in turn will affect how much you can borrow.
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Have A Question About Our Mortgage Calculators
What is a mortgage calculator?
Its a tool that gives you an estimate of how much you could borrow from us or what your monthly repayments and other costs might be, for a mortgage in the UK.
We have different calculators that can help you in different ways each calculator does something slightly different.
Who is a mortgage calculator for?
Its for you if youre a first time buyer, youre looking to remortgage, move or buy an additional home, or youre a buy-to-let landlord.
What information do I need to use a calculator and how do you decide what I can afford?
When you apply for a mortgage or use our calculator, well ask you for information like
- How many people are applying
- Your income
- How much you regularly spend on things like your credit or store cards, loans, overdrafts, maintenance and pension
- Why youre applying for example, buying your first home, moving home, or buying a second home
We wont ask about groceries, utility bills or travel.
How much can I afford to borrow?
Our calculators give you a idea of what you might be able to borrow from us to buy a home, and what your monthly and total mortgage payments could be, for different types of mortgages.
Which mortgage calculator is right for me?
The most popular place to start is our borrowing calculator or our affordability calculator.
That First Big Payment
A big down payment could be a great way to reduce the size of a mortgage. But people who dont have a lot of money saved and dont want to wait to build a larger down payment can take on a high-ratio mortgage. Borrowers in Canada with less than a 20 per cent down payment must purchase mortgage insurance, which protects the lender in case of default. This could cost up to 3.35 per cent of the value of the mortgage and typically gets added onto the principal.
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Options To Consider When Choosing A Mortgage
Its important to consider these topics when choosing a mortgage:
Length of term
Open or closed
The fixed-versus-variable-rate decision has long been debated. A few years ago, Moshe Milevsky, a professor at York University, authored a report which suggested future homeowners go with a variable interest rate mortgage.1Footnote 1But since variable rates could go up any time, many borrowers opt for the more stable fixed-rate mortgage.
Today, the advantage of variable rates is uncertain. Yes, they remain below fixed ones, but the gap has become razor thin to the point where potential savings may not justify the risk of variable rates rising.
Calculator: Start By Crunching The Numbers
Begin your budget by figuring out how much you earn each month. Include all revenue streams, from alimony and investment profits to rental earnings.
Next, list your estimated housing costs and your total down payment. Include annual property tax, homeowners insurance costs, estimated mortgage interest rate and the loan terms . The popular choice is 30 years, but some borrowers opt for shorter loan terms.
Lastly, tally up your expenses. This is all the money that goes out on a monthly basis. Be accurate about how much you spend because this is a big factor in how much you can reasonably afford to spend on a house.
Input these numbers into our Home Affordability Calculator to get a clear idea of your homebuying budget.
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Why Calculate Mortgage Affordability
When you’re looking to buy a home, it’s handy to know how much you can afford. Being able to calculate an estimate of how much you’re able to borrow is an important part of setting your budget.
You also need to determine if you have enough cash resources to purchase a home. The cash required is derived from the down payment put towards the purchase price, as well as the closing costs that must be incurred to complete the purchase. We can help you estimate these closing costs with the first tab under the mortgage affordability calculator above.
Taken together, understanding how large a mortgage you can afford to borrow and the cash requirements involved will help you determine what kind of home you should be on the look out for. To learn more about mortgage affordability, and how our calculator works, have a read of the information below.
What Kind Of Mortgage Payment Can I Afford
Purchasing a home is one of the largest and most complicated expenses of a persons life. He may live there for the next 20 to 30 years. One big factor in the search for a home to buy is the mortgage payment. Future homeowners should use two different formulas to determine the long-term affordability of the home theyre considering buying.
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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.
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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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.
Bonus Question: If I Suddenly Come Into Money Should I Sock It Away Or Pay Off My Mortgage
If you have a windfall and feel like getting out from under your mortgage sooner than your term, its always a good idea. Interest rates wont stay this low forever, after all. Just make sure you have that six-month cushion of cash reserves. Most Canadian mortgages have flexible options for getting your mortgage paid off sooner, Keehn says. Each mortgage and bank is different, so check your documents.
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Income and debts
Annual household incomeYour income before taxes. Include your co-borrowers income if youre buying a home together.
Minimum monthly debtThis only includes the minimum amount you’re required to pay each month towards things like child care, car loans, credit card debt, student loans and alimony. If you pay more than the minimum, that’s great! But don’t include the extra amount you pay.
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To calculate how much house you can afford, we take into account a few primary items, such as your household income, monthly debts and the amount of available savings for a . As a home buyer, youll want to have a certain level of comfort in understanding your monthly mortgage payments.
For more on the types of mortgage loans, see .
Try A 3%down Conventional Loan
Its possible to get a conventional loan one backed by Fannie Mae or Freddie Mac with a down payment as low as 3% of the purchase price. Whats more, that down payment can often be covered with a down payment assistance grant or gift funds from a family member.
Just note that to qualify for a 3%down conventional loan, most lenders require a credit score of at least 620 or 640. For those with lower credit, an FHA loan might be more appealing.
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What Is The 28/36 Rule
Lenders may determine your ability to afford a new home by using the 28/36 rule. Breaking it down, the rule establishes that:
Housing expenses should be no more than 28% of your total pre-tax income. This includes your monthly principal and mortgage interest rate, annual property taxes, and private mortgage insurance payments .
Total debt should not exceed 36% of your total pre-tax income. This includes the housing expenses mentioned above credit cards, car loans, personal loans, and student loans so long as these monthly debt payments are expected to continue for 10 months or more.
In concrete numbers, the 28/36 rule means that a borrower who makes $5,000 a month should not spend more than $1,400 on housing costs every month. If youre a renter, thats the most you should spend on your lease to maintain good financial health.
However, for a homeowner, $1,400 should cover your monthly mortgage payment, as well as homeowners insurance premiums and property taxes.
Pay Down Some Of Your Existing Debt
The minimum payment on your credit accounts determines your debttoincome ratio. By paying down your credit card debt or eliminating a car payment, you can qualify for a bigger home loan.
For example, in the scenario above, reducing your monthly obligations by $200 could increase your maximum price from $234,000 to $270,600.
So Should I Buy A Home
The answer to that question depends on your financial status and your goals. Just because a lender is willing to give you money for a home doesnât necessarily mean that you have to jump into homeownership. Itâs a big responsibility that ties up a large amount of money for years.
Itâs important to remember that the mortgage lender is only telling you that you can buy a house, not that you should. Only you can decide whether you should make that purchase.
How Big A Mortgage Can I Afford
As a general rule of thumb, you can afford a mortgage that is 2 to 2.5 times your gross income. Ultimately, your income, debts, assets, and liabilities determine how much house you can afford. Your down payment and credit history impact your ability to get a mortgage and the interest rate you pay.
The 28/36 rule is a rule lenders often use to determine how big a mortgage you can afford.
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