The Key to Mortgage Approval & Payments: Simple Math
For house hunters who will be financing the purchase of their home with a mortgage, El Paso Times guest columnist Raul Amaya offers the key to home mortgage financing:
Simple math.
That’s what it comes down to. To save time, prospective mortgage applicants should first get pre-qualified by a mortgage lender before starting to look at homes. It’s free and takes much less time than you think.
The following mortgage “Rules of Thumb,” the total monthly house payments, which are slightly on the high side, are based upon current mortgage rates, a good credit score, and an acceptable debt-to-income ratio.
A mortgage calculator offers easy number-crunching, but for our purposes, when calculating the amount your gross annual income will allow you to borrow, multiply your gross annual income by 2.5.
If you earn $50,000 per year, 2.5 times $50,000 equals a $125,000 mortgage. Add to that the down payment and one has the price of home one can afford.
What would the total monthly house payment be on a $125,000 mortgage? The “Rule of Thumb” for calculating that, which includes principal and interest payments on the home mortgage, property taxes, mortgage insurance (if you need it) and homeowners’ insurance premiums, is as follows:
Divide the mortgage amount by 100. Thus on a $125,000 home mortgage loan, the total monthly house payment would be about $1,250.
Most big-ticket items require people to finance the items in installments, so many people think in terms of monthly payments. So if a home buyer wants to know the price of a home that a given total monthly house payment would afford him or her, multiply the mortgage payment one can afford by 100.
Suppose someone wants their total monthly house payment to be $900. Using this Rule of Thumb yields a $90,000 home by multiplying $900 times 100.
How much money would you need to earn annually to afford a $900 monthly house payment on a $90,000 mortgage? To calculate that, divide the home mortgage loan amount of $90,000 by 2.5, which in this case equals a $36,000 qualifying annual income.
Many times, home buyers can purchase a home without a down payment. Still this doesn’t mean that one can get a home without any expenses.
For instance, on a $100,000 home loan, with a $1,000 total monthly house payment, requiring a qualifying gross annual income of $40,000, the closing costs would be about $3,000.
A $100,000 home loan, with a 30-year term, at a 5.85 percent annual interest rate, will cost a borrower about $112,379 in interest.
If a mortgage borrower made the first payment in January, one year later upon reading their annual mortgage statement he/she would discover that of the $7,079 paid in mortgage payments $5,816 went to interest, and a mere $1,263 was applied to pay down the principal, leaving a balance of $98,737.
This is the consequence of financing a large sum of money over an extended period. Still, the benefits of ownership (equity accrual, appreciation, income tax deductibility of mortgage interest and property taxes) beat renting in nearly all cases.
SOURCE: El Paso Times