If math frighten you, as it does many people, don’t let it deter you from the goal of home ownership. Mortgage math may seem super tricky, but realtor.com has broken down basic mortgage math so that you don’t have to minor in accounting to follow along.
The down payment
Down payment math can depend largely on the type of loan you get, with some down payments ranging as low as 3.5% of a home’s value. If you wish to avoid private mortgage insurance, you’ll need a 20% down payment – that’s 20% of the home’s total price.
Realtor.com suggests that if 20% is too much for you to afford, strive for 10% for a slightly better interest rate.
Amount of loan
You want a nice house but you don’t want to get in over your head – finding a mortgage amount that’s just right comes down to determining your debt-to-income ratio. For conventional loans, realtor.com says, your ratio should be lower than 36%, meaning your debts don’t exceed more than about one-third of your income.
How do you figure DTI? Start with your gross income (your income before taxes), divide it over 12 months, and then total up your debts for a year – credit cards, loans, anything that shows up on a credit report. Divide that by 12 to get your monthly debt and add that number to your mortgage payment for your total monthly debt.
Divide your monthly income by your total monthly debt to get your DTI!
Your monthly payment can obviously be found by stretching out the cost of your home over 30 years or 15 years – also considering property taxes, home insurance, HOA fees, and other costs. Realtor.com uses the average home cost in their mortgage math – check out the example provided here. [LINK]