Learn How to Calculate a Mortgage Payment and Budget Accordingly
Calculating a mortgage payment and budgeting accordingly are the keys to getting the home of your dreams that fits within your lifestyle. Here are some tips to get you started:
1. Calculate Your Debt-to-Income Ratio
Lenders take into account all of your debt payments when determining if or not you can afford a monthly mortgage payment. This includes your mortgage, car loan and any other owed amounts such as credit cards or student loans.
2. Ideally, your total debt should not exceed 35% of your pre-tax income and 45% after-tax income.
3. Utilize a Mortgage Affordability Calculator
Our affordability calculator uses current mortgage rates to determine how much house you can afford, taking into account principal, interest, property taxes and homeowners insurance (HOA fees). You’ll want to adjust your loan terms accordingly according to your individual situation.
4. Calculate Your Down Payment
Your down payment and credit score will determine how much house you can afford. The more money put down, the less mortgage insurance you’ll need to pay out-of-pocket and lower your monthly payment will be.
5. Consider Adding Private Mortgage Insurance to Your Payment
If your down payment on your mortgage is 20% or lower, your lender is likely going to require that you pay private mortgage insurance (PMI). PMI costs 1% of the total loan amount annually and protects the lender in case you don’t make your monthly payments and end up losing your house. With PMI in place, lenders are much less likely to require foreclosure proceedings against you if this type of coverage exists.
6. Make Sure You Have Reserves In Case of Emergency
It’s easy to forget to set aside savings for emergencies, so having at least two months’ worth of mortgage payments saved up in an emergency fund can protect you from having to cover unexpected bills or being unable to make your monthly mortgage payment. With proper planning, making sure you have money set aside will prevent financial stress in times of hardship.
7. Calculate Your Down Payment
First-time home buyers should make sure they have enough money for a down payment. In some cases, it may be necessary to save up to 5% of the purchase price in order to qualify for a mortgage loan.
With a down payment and good credit score, you will increase your chances of finding the most competitive interest rate. Don’t be intimidated to shop around; even small differences can add up to thousands of dollars over the life of your mortgage, so taking time to find the ideal loan is worth taking.
8. Create Your Financial Statement
Constructing a financial statement gives you insight into your monthly expenses. You’ll also be able to view how much income you make each month and which bills need payment. With this document in hand, creating it won’t take long at all!
9. Review Your Income and Expenses
Before you begin searching for a new home, take time to create a budget. You can do this through either an online tool or spreadsheet. Ideally, 50 percent of your income should go toward essential items like food, utilities and housing.