Many homeowners turn to online tools to determine whether or not they can afford payments for a particular property, but online mortgage calculators are too often unreliable.
Different applications offer wildly different estimates for the same houses, and buyers end up confused or holding on to unrealistic expectations. An informed buyer is a happy buyer, so let's break down the elements that go into calculating a house payment.
This is the actual amount of money the bank has loaned you. Interest, taxes, and insurance are additional costs associated with the loan, the garnish, and the principal is the entree.
Subtract your down payment from the home's total purchase price, and the remainder is the principal. If you put $5,000 down towards a $20,000 home, then you have a principal of $15,000 (and a great deal!).
Interest is an ongoing fee that is applied to the outstanding balance of your loan. Interest is expressed as an annual percentage or APR. Mortgages have set terms -- 10, 15, and 30-year mortgages are a few of the spans. Lenders will offer you either a fixed interest rate or a variable interest rate that adjusts over the term of the loan.
If you have a fixed rate mortgage with an APR of 5%, and a principal of $100,000, then you will pay $5,000 of interest in a calendar year. Most mortgages calculate this interest charge monthly, so as the principal declines, so does the amount of interest paid, though the rate stays the same.
When interest rates drop, many homeowners will take the opportunity to refinance their home at a lower APR
Your local or state government will almost certainly levy taxes on your property. This varies based on the assessed value of your home. These taxes compensate the government for public services like schools and road maintenance. Many private lenders will include these taxes in your monthly mortgage payment, spread evenly across a calendar year. When a lender chooses to collect these taxes, they also assume the responsibility of paying the city or state when the bill comes due. Taxes are one of the main culprits when it comes to inaccurate online mortgage tools. The calculation of taxes is often overlooked completely, or not tuned specifically to the location of your new home.
If you have a mortgage then you will be required to carry homeowner’s insurance, which typically covers you and your home in the event of a fire, break-in or other catastrophic events. Just like taxes, insurance payments can be collected by the insuring institution, or rolled into your mortgage payment and submitted to the lender. It's worth considering when shopping for a home loan - do you want the convenience of paying one large sum to a single payee (the bank) or to have more individual control over the different taxes and fees?
In addition to homeowner’s insurance, buyers who provide a down payment less than 20% of the overall purchase price might have to purchase private mortgage insurance. This protects the lender against the possibility of default. It's also an additional cost that is not covered by most mortgage calculator tools.
Principal, interest, taxes, and insurance, also known as PITI, add up to your monthly house payment. Most lenders will only approve purchases where the combined PITI adds up to 28% of the buyers' monthly gross income. Online tools can give you a good estimate of PITI, but it takes a real estate professional or a banker to give you a completely accurate picture of how much house you can afford.
If you're in the market for a new home contact Jessica and Sarah today. We want to help make your dreams come true!