July 26th, 2016 3:48 AM by Jackie A. Graves, President
What’s more terrifying than global warming, national economic
collapse, or a zombie apocalypse? For many of us, it’s
math—especially the type involved in securing a mortgage to
buy a home.
mortgage math doesn’t have to be intimidating. Though a home
loan does indeed involve a few equations, it’s fairly easy to
break it all down into the kind of simple arithmetic every home buyer can
understand and, more important, needs to know.
note: The latest figures available show the median home costs about
$220,000, so we’ll use that figure as a base for our
calculations. Other figures we’ll use: an average family’s annual salary
$54,000 and it carries $7,630
you can contribute as little as 3.5% of a home’s value for a down payment,
lenders consider an ideal down payment
to be 20% of a home’s total price. So here’s the math on that
for the average-priced home:
20% of $220,000 = $44,000 down payment
would leave $176,000—the amount a home buyer will need for the mortgage.
reason to aim for 20% down: You’ll avoid paying private mortgage insurance,
which is typically required under that threshold. And that will cost you
about $1,000 per year, says David Bakke of Money Crashers.
if that hefty 20% is an unattainable goal, at least try to put
down 10% for a
significantly better interest rate than you’d get with 3.5%.)
mortgage can be paid off in numerous ways, but one of the most typical is
to stretch those payments out over 30 years—that way, you break it down
into bite-size pieces. Building off the numbers above, here’s how much
your average mortgage would cost per month:
$176,000 at 4% interest rate = $840.25 monthly payment
mind, this monthly bill does not include property taxes, home insurance,
HOA dues, or other home-related maintenance fees, which vary
by area but are in the ballpark of a few hundred per year for a
home at this price.
Also note that the longer you stretch out your
mortgage payments, the more you’ll end up paying in interest. Over 30
years, the total you’ll fork over in interest amounts to $302,490.33!
there are ways to lower the amount you pay in interest—like paying off your
loan faster. Finish in 15 years, and you’ll end up paying only
$234,333.13 in interest. Granted, for a 15-year loan you’ll have to cough
up more per month—$1,301.85 instead of $840.25. But the upside is
you’ll save a sizable chunk in interest over the life of your loan, and be
mortgage-free in half the time. So if you can afford it, it’s an option worth
course, you’ll want to buy a home that you can comfortably pay for.
So, how do you know how much is too much, too little, or just right? The
way they do this is by determining your debt-to-income ratio.
most conventional loans, experts say you’ll want your DTI ratio lower than 36%.
That means your debts don’t exceed more than about one-third of your income.
But how does a mortgage fit into that?
figure that out, start with your gross income (what you take home before
taxes). Let’s say your family pulls in the U.S. average, which is $54,000 per
year. Divide that over 12 months to get your monthly income.
$54,000 / 12 months = $4,500 income per month
total up your debts—including what you owe on credit cards, auto
insurance, and college loans. Remember, debt includes only items that
appear on a credit report, not recurring expenses like groceries or phone
bills. Since the average American carries an average debt of $7,630 per
year, we’ll use that number. Divide that by 12 to get your monthly debt:
$7,630 (average debt) / 12 months = $636 debt per month
add that monthly debt to your average monthly mortgage payment of $840.25
to get your total debt owed per month:
$636 debt + $840.25 mortgage = $1,476.25 debt per month
divide your monthly debts by your monthly income
$1,476.25 monthly debt / $4,500 monthly income = 33% DTI
scenario, the debt-to-income ratio is 33%—just below the 36% cutoff. Which
means this mortgage would most likely pass the bank’s muster with
flying colors! Calculate your own DTI here.
Not so hard. Granted, this is a simplified version of mortgage math; your
own results will depend on your income, debts, and other
circumstances. But if there’s one thing we hope you take away from this,
it’s that mortgages are nothing to fear—a little knowledge goes a long
way. And if you get stuck, there’s no need to copy from your neighbor’s
paper, since we have this handy mortgage
calculator to help you
whiz through these permutations with ease.
By Margaret Heidenry - To view the
original article click here