Use A Mortgage Loan Calculator Correctly To Determine How Much Home You Can Afford

by Charles on April 16, 2012 · 6 comments

in Real Estate

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.

BeatingTheIndex April 17, 2012 at 9:56 AM

I agree wit h you on the 30% rule, as an extra, they can also consider affording a small lump sum payment on their mortgage once a year. It shaves years off the mortgage and saves a lot of interest.
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Dr. Dean April 17, 2012 at 6:55 PM

The loan calculator is a very handy tool. You’re friends are smart to seek you out. That was a really good series of posts you wrote recently in a similar vein.
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maria@moneyprinciple April 18, 2012 at 3:25 PM

Good set of tools. And I agree with Dean – very good series (and it made me consider my situation very seriously; still not resolved – it may turn out we have too much house).
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Michael Davis April 19, 2012 at 12:28 AM

Cut your coat according to your cloth. I think it’s needed to take some serious calculation before going for a home loan. I agree on your idea to not exceed 30%. Great post! Very informative. Thanks so much.
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Easy Instant Loan May 31, 2013 at 12:02 AM

There is no have to give any safety measures getting these loans so if one does not desire to
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