Important Terms to Know for the Home Affordability Calculator
Not sure what a term on the affordability calculator means? Here’s a list of definitions to help you out.
Gross monthly income
This is your monthly income before any deductions or taxes are taken out.
The quickest way to estimate your gross monthly income is to divide your annual salary by 12. If you work on an hourly basis, you can calculate your annual salary by multiplying your hourly wage by how many hours you work per week. Multiply this number by 52 to determine how much you make in one year.
Other monthly debt
Consider any other debt you are currently paying off: student loans, auto loans, credit card bills, etc. Add up the monthly bill of each of these to come up with your other monthly debt amount.
Loan rate
The interest rate, sometimes referred to as the loan rate, is what a lender charges you in exchange for being able to borrow their money. It’s calculated as a percentage of your total loan amount and added to the loan’s principal balance.
Your loan rate is determined by the lender and can depend on several factors, including your credit score, home location, home price, loan type, and more.
Loan term
The loan term is the length of your home mortgage. Mortgages are typically repaid over a 30-year, 20-year, or 15-year period.
Down payment
The down payment is the initial payment that a borrower puts up when purchasing a house. Homebuyers will put a percentage of the home’s value down (usually anywhere between 5% to 20%) and borrow the rest from a lender.
Loan amount
The loan amount is simply how much you are borrowing. This is not the same as the house’s purchase price— it is just the money that the bank lends you. If you need to estimate your loan amount, subtract your down payment from the home’s purchase price.
Purchase price
The purchase price is the total cost of the home that you purchase. This includes your loan amount, plus any down payment that you put down.
Estimated closing costs
We know that borrowing money from a bank isn’t free. This is the general term for the set of expenses consisting of, but not limited to:
- Loan application fees
- Loan underwriting and origination fees
- Home appraisal
- Homeowners insurance (the first year)
- Title search/insurance fees
- Credit report fees
- Settlement fees
- Mortgage points
Typically, these costs range from 2% to 6% of the loan amount.
Front-end ratio
The front-end ratio is also known as the mortgage-to-income ratio. This indicates how much of an individual’s income goes towards mortgage payments each month.
To calculate your front-end ratio, take your total mortgage expenses, and divide it by your total monthly income. For example, say your estimated monthly mortgage expenses are $2,000 ($1,900 in mortgage payments and $100 in HOA dues), and your income is $6,000 per month. If you divide $2,000 by $6,000, you will get approximately .33, or 33%. This is your front-end ratio.
Lenders use this number, in addition to the back-end ratio, to help determine loan approval.
Back-end ratio
The back-end ratio is also known as the debt-to-income ratio. This indicates how much of an individual’s income goes towards paying debts each month. Total debts include your mortgage payment (including taxes, insurance, and interest) and any other debt, such as auto loan payments, student loan payments, credit card payments, and child support.
To calculate your back-end ratio, take your total monthly debt payments, and divide it by your monthly income. So if your total monthly debt payments are $3,000 and your monthly income is $6,000, your back-end ratio is 50%.
Maximum PITI (front)
PITI stands for principal, interest, taxes, and insurance— the four main mortgage payment components.
With the calculator, you have the option to set your desired front-end ratio. Keep in mind that most lenders prefer the front-end ratio to be no more than 28% for most loans. The “Maximum PITI (Front)” feature tells you what your maximum monthly loan payment can be to stay within the desired front-end ratio range, given your specified income.
Maximum PITI (back)
This is very similar to the “Maximum PITI (Front)” feature on the calculator. The calculator allows you to set your desired back-end ratio. Note that most lenders prefer the back-end ratio to be no more than 36% in most cases, although exceptions can be made. The “Maximum PITI (Back)” feature tells you what your maximum monthly loan payment can be to stay within the desired back-end ratio range, given your specified amount of other monthly debts.
Hazard insurance
Hazard insurance is a type of insurance policy that covers damage caused by natural events such as storms, hail, fire, etc. Provided that the policy covers the weather event, homeowners will receive monetary compensation if they file a claim due to damage.
Property taxes
Property tax is an ad valorem tax, meaning that it is based upon an item’s assessed value. This means that the amount you pay in property taxes is directly related to your property’s value and is calculated as a percentage. In the United States, taxes are levied on the local level by taxing units such as counties, school districts, cities, and special districts.
Monthly HOA fee
Some neighborhoods require that homeowners belong to the HOA, or homeowner’s association. These are private associations most often formed by real estate developers to manage homes in that subdivision. Membership comes with a fee used to pay for amenities, property maintenance, or repairs.
Mortgage insurance
Mortgage insurance is a special type of insurance policy designed to recoup a lender’s losses if the borrower falls behind on payments and defaults. Private mortgage insurance is most often required when a home buyer makes a down payment of less than 20% of the home’s purchase price.
On the Mortgage Insurance Table under the “Loan Factors” tab, you’ll see the letters LTV%. This is the loan-to-value percent and is calculated by dividing the mortgage amount by the home’s appraised property value.
More calculators
Looking for more tools to help get your finances in order? Check out Amplify Credit Union’s Financial Calculators page for calculators that will help you do the math with everything from retirement to debt consolidation to saving for college.
