The home loan calculator, also known as the house loan calculator, is a simple tool that helps you find out the monthly payment on a home loan so you can easily answer the question "How much home loan can I afford?".
With this tool, you can also follow the loan's balance and how the interest and principal payments are divided in the home loan amortization schedule. Read on to see what types of home loans you may find on the market and how to apply for a home loan.
How much home loan can I afford?
When you are about to buy a new home, the first thing you need to do is to plan your finances. You will probably need to turn to a bank for a home loan to afford at least part of the purchasing price.
You should always shop around for a home loan or mortgage that provides the best financing deal. Besides the borrowed amount, the most crucial factor determining your monthly payment is the interest rate, or APR, and the length of time given to pay off your housing loan. The monthly payment alone, however, doesn't give you an exact picture on whether you can afford the given home loan. For a better insight, your monthly income needs to be compared to the amount given up to finance your mortgage.
This metric is the DTI ratio, and banks use it to check the amount of money you can borrow. More precisely, the DTI ratio for mortgage is your total monthly debt to your monthly pre-tax income expressed as a percentage. In general, a good DTI ratio doesn't exceed 28 percent, which means that your total monthly debt is no more than 28 percent of your monthly income. For example, if your monthly mortgage payment, with taxes and insurance, is 400 dollars a month and you have a monthly income of 1600 dollars before taxes, your DTI is
400 / 1600 = 0.25 = 25%.
Types of home loans
Because of the relatively high house prices compared to the average monthly salaries, most people cannot afford a new home from their income or savings alone. To overcome this problem, economies have developed a sometimes very complex financial structure to help get people on the property ladder. This specific type of loan is called a mortgage loan and it helps home buyers bridge the huge one-time expense by taking it out of their future incomes.
The US's mortgage market is a significant financial sector that includes government-sponsored institutes and programs to foster homeownership. The two government-sponsored enterprises are Fannie Mae and Freddie Mac, which enhance credit flow to the mortgage sector.
The most common types of mortgages are the following, with their main details.
1. Conventional mortgages
The federal government does not insure these loans, which can take two forms: conforming and non-conforming loans. Conforming loans have maximum limits set by Fannie Mae or Freddie Mac. Other home loans that don't meet these guidelines are non-conforming. The most common type of non-conforming loan is Jumbo loans.
- Interest rates might be higher, but the overall borrowing costs tend to be lower than other types of mortgages.
- You must have a debt-to-income ratio of 45 percent to 50 percent.
- You can pay 3 percent down for loans backed by Fannie Mae or Freddie Mac.
- You probably need to pay private mortgage insurance (PMI) if your down payment is less than 20 percent of the purchasing price.
If you are a borrower with strong credit, stable income, an employment history, and can afford at least a down payment of 3 percent, this loan might be optimal for you.
- You can borrow more money, thus buy a more expensive house.
- Interest rates are competitive.
- Down payment of at least 10 to 20 percent is required.
- Your debt-to-income ratio must be above 45 percent.
- You must have around 10 percent of the loan amount in cash or in a savings account.
2. Government-insured mortgages
Federal Housing Administration - FHA loans
- For borrowers with relatively low down payment and lower credit score.
- Require two mortgage insurance premiums, which can increase the overall cost of your home loan.
US Department of Agriculture - USDA loans
- It supports moderate to low income borrowers to buy homes in rural areas.
- Some USDA loans do not require a down payment for eligible borrowers with low incomes.
US Department of Veterans Affairs - VA loans
- These loans provide flexible, low-interest mortgages for US military members (active duty and veterans) and their families.
- Doesn't require a down payment or PMI, and closing costs are generally capped and may be paid by the seller.
Main features of government-insured home loans:
- Government-insured home loans help you finance a home when you don't qualify for a conventional loan.
- Credit requirements are more relaxed.
- Lower down payment.
- Higher overall borrowing costs.
- Beneficial for borrowers with low savings or a weaker credit history.
3. Fixed-rate mortgages
- These loans keep the same interest rate over the loan term, which means your monthly mortgage payment won't fluctuate but stays the same.
- Better option for planning your budget.
- Generally can choose between terms of 15 years, 20 years, or 30 years.
- The longer the term, the higher the charged interest.
- Interest rates are generally higher than rates on adjustable-rate mortgages.
4. Adjustable-rate mortgages
- Interest rates of adjustable-rate mortgages (ARMs) are not fixed, which means that they can go up or down depending on market conditions.
- Most of the ARM products have a fixed interest rate for a few years before changing to a variable interest rate for the rest of the term.
- Look for an ARM that caps how much your interest rate or monthly mortgage rate can increase by, so you don't get into financial trouble.
- You can save a considerable amount of money on interest payments.
5. Other types of home loans:
- Construction loans - designed for building a home.
- Interest-only mortgages - where the borrower pays only the interest on the loan for a set period.
- Balloon mortgages - which requires a large payment at the end of the loan term.
How to apply for a home loan?
After you choose the right lender, you need to initiate an application. Depending on the lender, you may be able to apply in person, by phone, or online. You will need to provide information about yourself and anyone else who will be registered as a co-borrower on the mortgage. The most important details you will need to provide are the following:
- Form W-2, officially, the Wage and Tax Statement for the last two years;
- Recent pay stubs covering the last 30 days;
- Complete bank statements for all financial accounts, including investments for the last two months;
- Signed personal and business tax returns;
- If self-employed, a copy of the most recent quarterly or year-to-date profit/loss statement; and
- A copy of the signed Purchase and Sales Agreement.
Your lender may require more documents, depending on your circumstances and the type of mortgage. You can expect your lender to ask you for details about your employment and financial history. Your lender will also run your credit report as part of the process with your permission, and its result can affect the applied interest rate.
Be sure to take your time and carefully fill out the application as completely and accurately as possible. Not disclosing credit problems up-front or holding back requested documents will only delay the process and potentially prevent mortgage approval, so it's to your benefit to fully disclose everything about your finances.
How to use the home loan calculator?
- Home loan amount - the amount of loan under consideration, which constitutes the principal part of the total payment;
- Loan term - the interval over which you are obliged to repay the loan amount;
- Interest rate - this typically refers to the quoted annual rate of interest, one of the most relevant factors you need to consider when taking a home loan.
- Monthly income - you may set your monthly pre-tax income, which is required for determining the DTI ratio. The higher the ratio, the higher your monthly debt relative to your income. From your side, a higher ratio indicates greater difficulty in financing your debt, and, from the side of the credit provider, it signals elevated risk;
- Compounding frequency (advanced mode) - how the lender computes interest on the principal. The lender may calculate interest annually (m = 1, where m means times a year) or quarterly (m = 4). Still, the general practice is that banks compound monthly (m = 12). This means that they determine the interest on the outstanding principal on a specified day in each month; and
- Extra monthly payment (advanced mode) - with this option, you can increase the computed monthly payment by a given amount and see its effect on your results.
After setting all specifications, the results appear simultaneously. You can see your DTI ratio, the necessary monthly payment to pay off the loan in the given loan term, the total payment amount, and the charged interest.
Besides, you can follow your balances and payments through a chart and table of the payment schedule or amortization table.
You should consider the home loan calculator as a model for financial approximation. All payment figures, balances, and interest figures are estimates based on the data you provided in the specifications that are, despite our best effort, not exhaustive.
For this reason, we created the calculator for instructional purposes only. Still, if you experience a relevant drawback or encounter any inaccuracy, we are always pleased to receive useful feedback and advice.