When purchasing a home, you might be wondering about your monthly mortgage payments. How much can you expect to pay, and what goes into calculating those payments? The monthly mortgage payment includes more than the loan principal; it also includes items such as taxes, insurance, interest and more. A few variables used in that calculation include:
If you purchase a condo or a home in a planned community, you may be responsible for homeowner’s association (HOA) fees. These fees cover a variety of shared expenses such as upkeep on common areas, the pool, tennis courts and other recreation areas. Landscaping may also be included. This fee is outside of your mortgage payment (which includes taxes, interest, insurance and PMI) and is paid on a monthly basis.
A lender uses a basic calculation to determine how much house you can afford. The formula relies on two inputs: your total household gross income and your total monthly debt. Most financial institutions prefer a debt-to-income (DTI) ratio that doesn’t exceed 36%; however, some will go as high as 40% to 50%. A higher ratio may require a larger down payment or a higher interest rate. A mortgage calculator can help you quickly determine your ratio, or you can calculate it yourself using the following information:
Calculate your DTI ratio by dividing your total debt by your total gross income. For example, let’s say that you and the co-borrower each earn $3,000 gross income per month for a total of $6,000. Total debt, which includes your potential mortgage, is $2,500. Divide $2,500 by $6,000 to get a DTI ratio of 41%.
If your DTI ratio is too high, consider paying off debt. Make a list of your debts, and determine which are highest each month. For example, if you have credit card payments, could you pay off lower balances and decrease total monthly debt obligations? Can you refinance an auto loan into a lower total monthly payment? Find opportunities to lower your debt payments.
Alternatively, you could consider making a larger down payment. Doing so will decrease your monthly mortgage payment and help lower your overall DTI ratio.
Determining how much you can afford is a good first step toward homeownership. A calculator can help you review different scenarios to determine how much you can afford and which is right for your circumstances. The rates in a mortgage calculator can be easily adjusted to reflect your current situation.
A mortgage calculator can help you get a clear idea about the terms that you want on your mortgage rate. For example, a low interest rate may be critical, or the ability to make a small down payment with a higher interest rate may be acceptable. When you can successfully calculate different scenarios, you can better understand the next best steps.
