Many of my friends are currently in the market for a new home. And they have asked me questions about how much home they can afford and how much cash they need to buy a home. My general rule of thumb is that the total monthly mortgage payment should not be more than 30% of your net income, give or take a few percentage points. The problem is that it’s hard for an average non-financial person to figure out the equivalent monthly mortgage payment of, let’s say, $500,000. That’s where a simple mortgage loan calculator comes in handy. By simply entering total loan amount, expected interest rate, and the loan term, you can quickly find out what the total principal and interest payments will be. For the record, a $500,000 loan for 30 years at 4% APR equates to $2,387.08 principal and interest every month.
However, that’s not all. While a simple loan calculator is useful, it does not account for other payments you would need to be responsible for. Property taxes can add another 1-2% of the home assessed value every year and home insurance and home owners associations (HOA) fees and add up to quite an amount loan calculators don’t consider. These items can put you at another $6,000 – $12,000 per year to your total costs. That means your $2,387.08 principal and interest payment suddenly went up to over $3,300 per month! Using the 30% rule, you would need to bring home $11,000 every month to be able to afford your $500,000 home.
A mortgage loan calculator can be a useful tool to help you determine how much you can afford, but learn to consider these other important items as well. In addition, I recommend learning more about home maintenance costs, which can be substantial as well. I recently had to fix a leak on the roof which cost me over $1,200 out of my own pocket to fix. However, if you keep the general rule of thumb of 30% as mentioned above, you should be OK.
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