Searching for a new home is exciting. But it can be easy to get so caught up in the perfect neighborhoods and dream floor plans that you forget to consider just how much you can spend on a new home.
There’s more to think about than just your monthly income when asking yourself, “How much mortgage can I afford?” To help you do the math, we’ve built a Home Affordability Calculator. Just fill out the loan and your financial information; it’s ok to guess but make sure to overestimate. You’ll want to play it safe when it comes to such a big purchase, and there may be more costs to owning a home that you aren’t aware of yet. The calculator will estimate how much you can afford to pay on your new home. See how it fits into your budget and adjust from there!
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Enter your monthly income before any deductions or taxes are taken out.
Consider all debts and loans you’re currently paying off, like student loans, auto loans, credit card bills, etc. Add up the monthly payments for each of these to get the total debt payments you make per month.
The loan term is the length of your home mortgage. Mortgages are typically repaid over a 30-year, 20-year, or 15-year period. Because a 30-year mortgage is more common, we recommend starting with this option.
The interest 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.
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.
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.
This one number actually may consist of two amounts: homeowners’ insurance and private mortgage insurance (PMI).
Homeowners’ insurance is a type of insurance policy that covers damage to your home and your belongings. You may also see the phrase “hazard insurance” used; homeowners’ insurance policies include hazard insurance, but typically cover more than the minimum for hazard insurance. Every homeowners’ insurance policy is different, and it’s very important to ask for an accurate quote from multiple insurance providers. Every insurance company covers natural events, theft, and other damage differently and in different amounts. If you have valuables that you’d like to insure, it’s important to understand how those will be covered as well. Quotes are relatively easy to get—just call some of your local insurance agents and describe your future home (or the types of homes you’re looking at).
Private mortgage insurance (PMI) insures the mortgage lender if you foreclose on your home. If you put down less than 20% as a down payment, your lender may require you to carry PMI. It’s a little harder to obtain this quote, as it varies per lender, but it can vary between .5%-2% of the total loan amount.
These factors can be used to refine your home affordability number. Change these one at a time to see how they affect your purchase price; you can find the corresponding bar in the chart on the right.
Also known as the mortgage-to-income ratio, the loan-to-value ratio (LTV) compares your loan amount to the actual value of the home. This ratio is used by a mortgage lender to assess the level of risk they assume by lending you money. The higher the ratio, the higher the risk, and the higher the interest rate.
For instance, if you have $15,000 to put toward a down payment on a home, but the home’s value is $300,000, you are only putting 5% down. Your LTV is 95%.
A loan with an LTV of 80% or higher typically needs private mortgage insurance (PMI). If you’re putting less than 20% down, you will most likely have to carry PMI.
Use this entry to see what a larger (or smaller) down payment affects your overall purchase affordability.
This is a useful number to know for the sake of your budget. There is a budget strategy known as 50/20/30, and in this framework, your housing payment should be no more than 30% of your income.
Try starting at 30%, and then working your way down. A smaller number means less debt and less money being taken from your income, but it may also mean a less expensive house.
This number indicates how much of your income goes towards paying debts each month, including your housing expense. 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 DTI ratio, take your total monthly debt payment and divide it by your monthly income. Lenders typically want to see a DTI of less than 36%.
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.
This is your mortgage payment; it covers both principal (the amount originally borrowed) and the interest (the amount of interest you owe per month). Because a mortgage is paid off over decades, the interest you’ll pay in year one is a lot higher than what you’ll pay in year 15.
This includes your P&I payment, your property taxes, any PMI, and your homeowners’ insurance.
Becoming a homeowner is complex and can involve a lot of charges that change per situation. The two biggest costs not included in this calculator are a monthly HOA fee and your total closing costs. They’re not included because they can vary by a lot, and they aren’t always applicable to every situation.
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.
If you anticipate belonging to an HOA, make sure to add that on top of your monthly payment.
Estimated Closing Costs: This is the general term for the set of expenses consisting of, but not limited to:
Typically, these costs range from 2% to 6% of the loan amount. These fees can be due over the course of your home purchase, and the remaining amount is due at closing. You can read more about closings costs on our blog.
The most important factor in all of this is simple: does it fit into your budget? Whether you’re not sure where to start with your budget or you’re looking for tips to level up your skillset, you can check out our blog posts on Money Management for more helpful articles! We want to provide you the kind of financial advice you need to accomplish your goals.
This calculator is for illustrative purposes only and based on information provided by the user. Accuracy is not guaranteed. All loans are subject to approval. Your actual rate, terms and fees may vary. Your Monthly Payment calculations reflect only principal and interest, and amounts for taxes and insurance, if applicable, may increase your actual payment.
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