How Much Mortgage Can I Afford?
How We Calculate Your Home Affordability Estimate:
We estimate your home affordability based on your annual income, down payment, monthly spending, loan type, and current average APR.
Annual Household Income
In order to determine how much you can afford to pay each month, we start by looking at how much you earn (salary, wages, tips, commission, etc.) each year before taxes. This should be the combined income for people searching for a home together.
Once we have your monthly expenses, we can determine how much money you have left to spend on a monthly mortgage more accurately. Take into account debt (car loans, student loans, credit cards, etc.), recurring payments (insurance, utilities, subscriptions, etc.), groceries, and even savings that would not go toward your mortgage, when calculating your monthly spending.
There are several types of mortgage loans, but the most commonly used are fixed-rate and adjustable-rate loans. Fixed-rate loans have the same interest rate for the entire duration of the loan. That means your monthly payment will be the same, even for long-term loans, such as 30-year fixed-rate mortgages. Two benefits of this loan type are stability and being able to calculate your total interest up-front. Adjustable-rate mortgages (ARMs) have interest rates that can change over time. Typically, they start out at a lower interest rate than a fixed-rate loan, and hold that rate for a set number of years, before changing interest rates from year to year. For example, if you have a 5/1 ARM, you will have the same interest rate for the first 5 years, and then your interest rate will change from year to year. The main benefit of an adjustable-rate loan is starting off with a lower interest rate.
Loan Term and Interest Rate Options
The monthly amount of your mortgage payment depends on loan term (duration) and interest rate. Generally, a longer-term loan will have lower monthly payments, but at a higher interest rate, so you’ll end up paying more money overall. You can build up your credit or save for a larger down payment to qualify for a lower interest rate. A lender can also help determine a financial plan, and present the best loan payment, loan term, and interest rate for your needs.
The Annual Percentage Rate (APR) is a number designed to help you evaluate the total cost of a loan. In addition to the interest rate, it takes into account the fees, rebates, and other costs you may encounter over the life of the loan. The APR is calculated according to federal requirements and is required by law to be stated in all mortgage loan estimates. This allows you to better compare different types of mortgages from different lenders, to see which is the right one for you.
Annual Property Tax (%)
As a homeowner, you’ll pay property tax either twice a year or as part of your monthly loan payment. This tax is a percentage of a home’s assessed value and varies by area. For example, a $500,000 home in San Francisco, taxed at a rate of 1.159%, translates to a payment of $5,795 annually. When you buy a home, you will typically have to pay some property tax back to the seller, as part of closing costs. Because property tax is calculated on the home’s assessed value, the amount can typically change drastically once a home is sold, depending on how much the home raised or decreased in value.
Monthly Mortgage Payment
When calculating how much home you can afford, we estimate how much you will pay each month for your mortgage. Your monthly mortgage payment will include principal and interest. It can also include property taxes, homeowners’ insurance, homeowners’ association (HOA) fees, and private mortgage insurance (PMI) if your down payment is less than 20 percent. Additionally, it’s a good idea to budget one percent of your home price for home upkeep, repairs, and maintenance.
The typical rule of thumb is to pay 20 percent of the home’s price as your down payment, although some mortgage loans require as little as 3.5 percent down. Your down payment reduces the total amount of your mortgage loan, so the more money you put down, the more expensive a house you can buy. At the same time, you can put more money down to decrease your mortgage payment each month. Use the affordability calculator to see how your down payment affects your home affordability estimate and your monthly mortgage payment.
Homes in Your Price Range
We use your home affordability estimate to determine which for-sale homes you can afford to buy in the location you specify.
Though we don’t factor credit scores in our home affordability estimate, it is an important factor in qualifying for a loan and determining interest rates. Generally, the higher the credit score, the lower the interest rate will be for most loans. This means your overall payment will be lower. Even lowering your interest rate by half a percent can save you thousands of dollars.
Here are some few documents to help you understand your financial situation and how much house you can afford:
- Recent statements from all banks and investment accounts
- Pay stubs and W-2 income tax forms
- Total monthly expenses, including all bills, groceries, clothing budgets, etc.
- All of your assets, including stocks, 401(k), IRAs, bonds, cash, rental properties, etc.
- All debt including credit cards, student loans, car loans, mortgages, etc.
- Credit score
- Profit and loss statements if you are self-employed
- Gift letters if you are using a gift to help with your down payment
The affordability calculator is intended for planning and educational purposes only. The output of the tool is not a loan offer or solicitation, nor is it financial or legal advice. Talk to a lender to find out exactly how much home you can afford.