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Mortgage Calculator
Buying a house is exciting. Paying for it is terrifying. Use this tool to see the real numbers—taxes, insurance, and all—so you don't end up "house poor."
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Evaluating Home Affordability: Beyond the Monthly Payment
Purchasing a home is one of the most significant financial commitments an individual will make. While most prospective buyers focus on the "sticker price," true affordability is determined by the total monthly cost of ownership, often referred to as PITI (Principal, Interest, Taxes, and Insurance).
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Financial advisors often recommend the 28/36 Rule: your mortgage payment (PITI) should not exceed 28% of your gross monthly income, and your total debt obligations should not exceed 36%. Staying within these margins ensures you maintain liquidity for other financial goals like retirement and emergency savings.
Understanding PITI
A comprehensive mortgage analysis must account for four primary components:
- Principal: The portion of the payment that reduces the remaining balance of the loan.
- Interest: The cost charged by the lender for the use of the credit. In the early years of a mortgage, interest constitutes the majority of the payment.
- Taxes: Real estate or property taxes are assessed by local governments and are often held in an escrow account.
- Insurance: Includes homeowners' insurance and, if the down payment is less than 20%, Private Mortgage Insurance (PMI).
⚠️ The "Maintenance Gap"
New homeowners often fail to budget for ongoing maintenance. A standard rule of thumb is to set aside 1% to 2% of the home's purchase price annually for repairs and upkeep. For a $400,000 home, this means budgeting an additional $4,000 to $8,000 per year.
Strategic Loan Selection: 15-Year vs. 30-Year
The choice between a 15-year and 30-year term involves a trade-off between monthly cash flow and total interest expense. A 15-year mortgage typically offers a lower interest rate and allows equity to build significantly faster, but requires a much higher monthly commitment. Conversely, a 30-year mortgage provides more monthly flexibility, which can be redirected toward other high-yield investments.
Mortgage Loans: Frequently Asked Questions
How much house can I afford based on my salary?
Lenders typically use the debt-to-income (DTI) ratio to determine affordability. A common benchmark is that your total monthly debt, including your new mortgage, should not exceed 36% to 43% of your gross monthly income. Use our calculator to see how different interest rates impact your purchasing power.
What is the impact of a larger down payment?
A larger down payment reduces your loan-to-value (LTV) ratio, which can lead to lower interest rates and eliminate the need for Private Mortgage Insurance (PMI) if you reach the 20% threshold. It also results in lower monthly payments and less total interest paid over the life of the loan.
How do interest rates affect my long-term costs?
Interest rates have a compounded effect on the total cost of a home. For example, a 1% increase in the interest rate on a $300,000 30-year mortgage can increase your total interest paid by over $60,000. It is often beneficial to wait for a better rate or buy down points if you plan on staying in the home long-term.