How to Calculate a Mortgage
If you’re shopping for a new home in California, you can calculate the home price you can pay and the mortgage schedule you will need based on the payment, down payment, taxes, and insurance you can afford. This calculation will provide an estimate of your house price range based on the monthly payment you can afford for a mortgage. Other factors include your credit rating and fees that you pay up front or roll into the mortgage loan. When you fell you’re ready to initiate the purchasing process you should obtain professional mortgage advice on your actual affordability. Below are three of the main types of mortgages.
A typical fixed-rate mortgage is calculated so that if you keep the loan for the full loan term — for example, 30 years — and make all of your payments, you will precisely pay off the loan at the end of the loan term. The payment depends on the loan amount, the loan term, and the interest rate. You can use any number of online calculators to determine the monthly principal and interest payment for different scenarios.
A balloon loan has a much shorter loan term than a regular mortgage (typically only five years), and payments are calculated as if the loan was going to last for the 30-year standard. The monthly payments aren’t high enough to pay off the full loan, and the remaining loan balance is due as one large final payment (known as the “balloon” payment) at the end of the loan term.
For example, if your mortgage is $100,000 for 30 years at an interest rate of four percent, your monthly principal and interest payment would be $477 per month. With a regular 30-year loan you would make this payment for 30 years. With a five-year balloon loan, you would make this payment for five years and then owe the remaining balance of the loan, or $90,448, at the end of the term.
Adjustable-rate mortgage (ARM)
If you have an adjustable-rate loan, your initial payments are calculated assuming that your initial interest rate remains the same for the entire loan term. When your interest rate adjusts, your payment will typically be re-calculated based on the new interest rate and the remaining loan term.
How to calculate your mortgage payment
1. PREPARE A DETAILED BUDGET
Traditionally, you can typically afford a home in California priced two to three times your gross income. Which means, if you earn $100,000, you can typically afford a home between $200,000 and $300,000.
It’s not the best method because it doesn’t consider monthly expenses and debts. Those costs greatly influence how much you can afford. If you earn $100,000 a year but have $1,000 in monthly payments for student debt, car loans, and credit card minimum payments, you won’t have the same funds to pay your mortgage as someone earning the same income with no debts.
Prepare a budget that tallies your ongoing monthly bills for all expenses: credit cards, car and student loans, lunch at work, day care, date night, vacations, and savings. See what’s left over to spend on home ownership in California like your mortgage, property taxes, insurance, maintenance, utilities, and community association fees, if applicable.
2. FACTOR IN YOUR DOWN PAYMENT
If make a down payment for at least 20% of the home’s cost, you may not need to get private mortgage insurance, which protects the lender if you default and costs hundreds each month. The higher your down payment, the lower your monthly payments will be which leaves more money to make your mortgage payment. Conversely, the lower your down payment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment. Also keep in mind if home prices or interest rates are rising, and you wait to buy until you accumulate a bigger down payment, you may end up paying more for your home.
3. CONSIDER YOUR OVERALL DEBT
Lenders usually follow the 43% rule. This means monthly mortgage payments covering your home loan principal, interest, taxes and insurance, plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 43% of your gross annual income.
Here’s an example of how the 43% calculation works for a homebuyer in California making $100,000 a year before taxes:
- Your gross annual income is $100,000.
- Multiply $100,000 by 43% to get $43,000 in annual income.
- Divide $43,000 by 12 months to convert the annual 43% limit into a monthly upper limit of $3,583.
- All your monthly expenses including your potential mortgage cannot be more than $3,583 per month.
It’s possible a lender will give you a mortgage with a payment above the 43% line, but consider carefully before you take it. Evidence from studies of mortgage loans suggest that borrowers who go over the limit are more likely to run into trouble making monthly payments, the Consumer Financial Protection Bureau warns.
4. USE YOUR RENT AS A MORTGAGE GUIDE
The tax benefits of homeownership in California generally allow you to afford a mortgage payment, including taxes and insurance, of about one-third more than your current rent payment without changing your lifestyle. Multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.
Using this example, if your rent is $1,500 per month, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership. However, if paying rent is straining your finances, buy a home that will give you the same payment rather than going up to a higher monthly payment. Always remember homeownership has added overhead that your landlord now covers, like property taxes and repairs. If there’s no room in your budget for those extras, you could become financially stressed.
Owning a home in California should make you feel safe and secure, and that includes financially. Be sure you can afford your home by calculating how much of a mortgage you can safely fit into your budget. Do your research and be ready so when it comes time to buy your home you aren’t faced with financial surprises. You’ll go into the loan process knowing what you can comfortably afford.