There are a lot of important money choices to make when you buy a home. A mortgage calculator can help you decide if you should:
- Make a larger down payment to get a lower monthly payment. The more you put down, the less you’ll pay each month.
- Pay extra to avoid or reduce your monthly mortgage insurance premium. PMI premiums are based on your loan-to-value (LTV) ratio, which measures how much of your home’s value is borrowed. A lower LTV ratio results in a lower mortgage insurance premium. And don’t forget, you can skip PMI with at least a 20% down payment.
- Choose a shorter term to build equity faster. If your budget can handle the higher monthly payments, your home equity — the difference between your loan balance and home value — will grow more quickly.
- Skip a neighborhood with pricey HOA fees. Those HOA amenities may not be worth it if they put too much strain on your monthly budget.
- Rethink your housing needs if the payment is higher than expected. Don’t bite off more housing expenses than your budget can chew. Do you really need that fourth bedroom, or could you make it work with three? Is there a neighborhood with lower property taxes nearby? Could you budget an extra 15 minutes in commuter traffic to live further away and save an extra $150 on your monthly mortgage payment?
- Track how much equity you’ll build over time. Each mortgage payment chips away at your loan balance. If you look at an amortization schedule, you’ll notice at first you pay more interest than principal. As your loan balance drops, you’ll pay more toward principal and less toward interest until your loan is paid in full.
Think a shorter term will work for you? See 15-year mortgage rates
How much house can I afford?
You can use a mortgage payment calculator to help manage your budget and see how a mortgage payment will impact your overall finances. You can use the results to:
Determine your debt-to-income (DTI) ratio. Lenders calculate your DTI ratio by dividing your total monthly debt — including your new mortgage payment — by your pretax income. The Consumer Financial Protection Bureau (CFPB) recommends keeping your DTI ratio at 43% or less. However, some loan programs allow up to a 50% DTI ratio if you have excellent credit and extra savings. Here’s an example:
Your total monthly debt is $650 and your pretax income is $5,000 per month. You’re considering a mortgage that has a $1,500 monthly payment.
→ This puts your DTI ratio at 43%, because ($1500 + $650) ÷ $5,000 = 43%.
Analyze your cash flow budget with a house payment. It’s important to plug your mortgage payment into your budget for two reasons:
- Lenders don’t consider all of your expenses. A mortgage loan application doesn’t require information about car insurance, dance classes, sports fees, entertainment costs, groceries and other expenses that are part of your family’s lifestyle. You may need to cut back on some non-housing expenses — or choose a cheaper home — if your new mortgage payment leaves you without a cash cushion.
- Your take-home pay is less than the income lenders use to qualify you. Lenders may look at your before-tax income for a mortgage, but you live off what you take home after all of your paycheck deductions. Make sure there’s wiggle room in your cash flow once you subtract your new mortgage payment from your take-home pay.