To calculate your general loan affordability range, you need to take into account a few primary items such as your max monthly payment, interest rate, term, and the start date for your loan. As a home buyer, it’s crucial to have a certain level of comfort in understanding your monthly loan payments.
Using a loan affordability calculator can be a helpful way to determine how much of a loan you can afford. However, when taking into consideration how much you can afford to pay each month, you need to look at not only your household income and monthly debts, but your overall savings. Your savings can vary depending on how much you want to set aside for future expenditures. A good idea is to have a buffer of three months of housing payments to help in case of any unexpected events.
How much of a loan should I take out?
When buying a house, the amount of loan you should accept doesn’t always have to be the highest amount that is presented to you. It’s important to consider all of your other monthly expenses and choose a loan that is manageable month after month. Just because you can receive a large loan, doesn’t mean you should take it. You don’t want to struggle to make ends meet every time your bill is due. That’s why it’s important to use a loan affordability calculator to get a better look at what you can afford and how that will stack up in your amortization schedule.
What is an Amortization Schedule?
Once you have calculated how much loan you can afford to pay off, you will get a detailed amortization schedule. This is a table that displays each payment on your loan over time. A portion of each monthly payment is applied toward the loan balance and interest. In the beginning, most of your payment goes toward the interest rather than the principal loan balance. Toward the end of your term, a larger share of the payment goes toward paying off your principal until the loan is fully paid off at the end of your term.
How much should I make each month to pay off my loan?
It’s not just about how much you make, but also how much you already owe in debt. Your income is only one part of the equation. Lenders use debt-to-income ratio (DTI) to determine if you qualify for a loan that will work for your home of choice. Your DTI is determined by dividing the sum of your monthly debts by your monthly gross income. Your monthly debts can include credit and car payments. Most loans require a DTI that does not exceed 45%.
What loan options are available?
Choosing the right mortgage loan is the most important step you’ll make when buying a home. There are many options out there, so finding one to fit your financial goals is possible. Each loan has specific requirements, but a few loans that you should always look into are:
- Fixed Rate Mortgage
- Federal Housing Administration Loans (FHA)
- Veterans Administration Loans
- USDA Loans
- Adjustable Rate Mortgage
- Jumbo Mortgage Loans
- Self-Employed Home Loan
- Enhanced Credit Opportunity Program (ECOP)
- Home Equity Conversion Mortgages (HECMs)
- 30 Year Fixed Rate Mortgage/ 15 Year Fixed Rate Mortgage