HOME LOAN CALCULATOR
Buying a house is one of the biggest purchases you'll ever make which is why it's so important to get all of your ducks in a row before you start applying for home loans. You'll want to make sure your credit report is clean and in good standing, make sure that you have a good amount of money saved for a sizable down payment, and you'll want to do some research on how much house you can afford.
One of the best things you can do is use a home loan calculator. This will give you a ballpark estimate on what your potential mortgage payment will be so you can see how it fits into your monthly budget and figure out if that works for you.
HOW TO USE THE MORTGAGE CALCULATOR
TYPES OF HOME LOANS
It may surprise you, but there are different types of home loans available and picking the right one for you can end up saving you tens of thousands of dollars.
Fixed Interest Rate
Much as the name implies, fixed interest rate home loans have the same interest rate throughout the life of the mortgage. That means the interest you pay on day one is the same as you pay on the last day. Your monthly payment will always be the same month in and month out.
Variable Interest Rate
These loans are also known as adjustable rate mortgages (ARMs) and while they may have a lower initial interest rate than a fixed rate loan, it can (and most likely will) change throughout the life of your mortgage. This could cause your monthly payment to go up and potentially make you unable to afford to make your payments.
These loans are provided by the Federal Government for all types of borrowers, but they're provided by traditional lending institutions like banks and credit unions. The Government simply backs them and provides lending protections for the banks so they can issue lower rates for lenders who may not qualify for those terms on their own merits.
These loans are exclusively for service members, both active duty and non-active duty, and are similar to FHA loans in that they are backed by the Federal Government. The unique thing about VA loans is that borrowers are able to finance the entirety of the loan instead of being required to put money down so they can save money or get into a larger home than they would otherwise be able to.
HOW MUCH HOME CAN YOU AFFORD?
It’s important to know what your ceiling is on how much you can spend on a home. This keeps you from overextending yourself financially and keep you on solid ground in case you have other unexpected expenses come up later.
The tried and true rule of thumb for how much you should spend on a home is the 28 percent rule. Financial experts say that you shouldn’t spent more than 28% of your gross monthly income on your mortgage payment. So, how does this look when you boil it down to cold, hard numbers? To figure out how much home you can afford, you need to know your gross income.
$100,000 income / 12 months = $8,333.33 gross monthly income
$8,333.33 * 0.28 = $2,333.33
$2,333.33 = Maximum mortgage amount
Bear in mind, that $2,300 is your total mortgage payment. That includes your HOA fees, homeowners insurance, property tax, everything.
Lenders know this same rule of thumb and they’ll take it into account when evaluating whether or not to approve you for one of their loans. If you don’t have enough disposable income to account for that payment, you may need to take a good hard look at your budget and make some cuts.
GLOSSARY OF TERMS
There are a number of terms that you need to know and may not be familiar with when you’re getting a home loan.
The principal on your home loan is the leftover balance that has not been paid off yet. Essentially, it’s your total loan value minus the payments you’ve already made.
This is the price of your home without HOA fees, property tax, or homeowners insurance added in.
Property tax varies from state to state since it isn’t regulated at the Federal level. You’ll typically see this tax at the county and state level depending on where you live. Don’t overlook this when looking at buying a new home or after you’ve bought your home. These taxes rise to the point that you can’t afford to live in your own home.
Your mortgage term is the length of your home loan. Most mortgages are 30 year loans which makes your loan term 30 years, or 360 months. You can also get a 15 year mortgage though this isn’t recommended if you aren’t earning a comfortable income.
Your interest rate is essentially what your lender charges for letting you borrow their money. It’s how they make money by lending money to borrowers like yourself. The better your credit score, the lower your interest rate will be since the lender will be more confident lending you money.
Homeowners insurance protects your property in the event of damage incurred by inclement weather, malfunctions, accidents, and vandalism. Lenders will require that you have homeowners insurance in place before they approve you for one of their home loans.
Not every neighborhood has a Homeowners Association (HOA), but they are becoming the norm. If you live in a neighborhood with an HOA, you’ll have to pay your HOA dues. These fees go towards maintaining and improving any and all community property within the neighborhood. This can include swimming pools, playgrounds, landscaping, basketball courts, etc.