Published

November 13, 2018

If you're looking for a comfortable monthly payment and how to calculate your housing expense, you're in the right place. So most of my clients understand that a housing payment involves a lot of different monthly fees. There will be principal, you have interests, there might be homeowners association, you're having utilities on top of that. There's mortgage insurance, there's regular insurance, there are taxes, there are fees all over the place. It really can feel overwhelming.

So what I want to do is break down what each of these costs are going to look like monthly. Then we're also going to break down what it looks like to have a comfortable payment. Because there's a difference between what you're approved for, and what's actually comfortable for you to live the lifestyle that you want.

So most of the clients that I work with are trying to get mortgages and loans set up in a way that sets them up for success throughout the rest of their life. There was no point in being house poor and going through a lot of struggle just to have a bigger house.

What we're going to detail here are three things. Number one, we're going to talk about what are you approved for. So this is all just strict numbers. We're going to look at all the data, all the expenses, just the numbers of the top limit of what you might be approved for.

So we're going to be conservative that we have a really good idea. When you go out shopping, how much of a mortgage.

Number two, we're going to look at, what's comfortable for you. See, this is the difference between what you can afford and then what is comfortable. Also, we're going to look at what's comfortable for you. What is necessary in order for you to set up a successful loan.

Then number three, we're going to talk about how to calculate it. We're not going to do any formulas or anything by hand. I'm going to show you a handy tool. It's just an online website that allows you to be able to just punch in some data and get some really quick ideas and a long-term understanding of what a mortgage is going to look like for you and your family.

So number one, what do you approve for, so let's first talk about PITIA. PITI with an A at the end, all this stands for is Principal, Interest, Taxes, Insurance, and Association Fees. So this is the total, what we call housing expense. This is what we look at as lenders to be able to see how much does the subject property cost in monthly expense for you as.

What we're doing with this housing expense is we're tying this together with your monthly debt obligations into an entire picture. That's called the DTI or the Debt-to-Income. Basically, all this is looking at is we're seeing how much total debt obligation you have per month versus how much gross income do you make per month.

So the easiest way to calculate your DTI is to take your monthly liabilities in the obligations and divide that by your gross. Let's jump into a quick example of what DTI looks like. So we're going to calculate our total debt-to-income.

Let's start with a pretty easy scenario. Let's say that you make $10,000 per month. So this is gross income that you get from wherever you work. So we have $10,000 per month as our gross income. Now on top of that, let's say that we have a car payment of $500. As well, we have $400 per month in other credit cards and different loans. So on a credit report, our total monthly debt obligations would be $900 per month.

Now notice we didn't put in any utilities, we didn't put in food expenses. We didn't put any donations. Everything else is not a debt that obligation we're just including debt obligations. So $900 per month into obligations. And then on top of that, we're adding in the pity payment. So we're adding in principal interest taxes, insurance, and any homeowners association fees.

So in this example, let's say that we have the $900 per month in regular debt and the $2,500 per month in our housing expenses. If we add those two together, we're going to get our total monthly debt obligations. And that adds up to $3,400. So simple division, we take $3,400 divided by $10,000, and that gives us 34% as our DTI.

Now, as lenders, we have a couple of different numbers in the back end, depending on what loan product we're working with on how high the to income ratio can go. It depends wildly on what assets you make, what your employment history looks like, what your income is like as well, but a safe and comfortable estimate. If you want to do this your income right now is 43%.

So simply all you have to do is take your income and multiply it times 0.43. So if you make $5,000. All you have to do is take 5,000 times 0.4, three, do it on a calculator. Right now that's $2,150. So if you make $5,000 per month, what you want to do is calculate your total debts, add those up, and then whatever extra you have will be, what's allowed for your housing expense.

Now keep in mind, this is the entire housing expense, so it's not just principal. It's not just interest. It also includes taxes. insurance and any other association fees that are included. So this is going to give us a really conservative estimate for when you begin finding what's the top of the limit that you're approved for.

Now, depending on what other assets you have and what are called compensating factors in your file that really strengthen your position with the loan. You might be able to go higher than 43%. There are clients that I've taken all the way up to a 49% debt-to-income ratio and higher. Those are some different loan programs and they require a little bit more assets in the backend to have as a compensating factor for having a higher debt-to-income ratio, but they are possible 43% though is going to be a great estimate for you to be on the conservative side of what you're approved for. So that's number one on what you're approved for.

So right now we're really heavy on the estimating side against things conservative. If you want a really clear picture of how much you can afford one of the best ways is to talk with the lender. When you talk to the lender, there's no obligation to move into the home buying process. All you can do is ask that lender to run some of the numbers that you have along with the debt obligations. And they can give you a very clear idea of what you will be approved for with a monthly payment and then a total mortgage amount as well. So that's number one on what you're approved for.

Let's move into number two, what's a comfortable monthly payment for you. So this one's a little bit quicker. Really, what we're focusing on here is making sure that when you're adding the housing. Even though lenders are only calculating housing expenses for you. You also want to be making sure you want to be making sure that you're adding in all the other utilities that are associated with owning the property.

You want to make sure that you're calculating in small things like are the repairs that you need to make with the property. Are there some leaky pipes, the walls need to be painted? Are you counting on the fact that you're going to need the most and grass, right? So all of these little things that add up to you being a homeowner, moving into a new home create a lot of small expenses that add up.

So make sure that you have some residual income and that you're not filling up your entire income amounts with obligations, whether full debt obligations or other monthly obligations. And it really comes down to you creating a lifestyle that's enjoyable. So you want to move into a house that's going to set you and your family up for success in the future and not a home that you dread to see that bill come in every month.

So make sure that the house that you get has a payment that's comfortable and that you have money to set aside for savings and that you have the money set aside to be able to put into things that you're passionate about and projects that you enjoy doing and not just be spending all of your money on the house because you're approved to that amount.

With that past example, just because that person was approved up to $2,500 or more as a housing expense, it doesn't mean they have to purchase a house that big, if they'd like to, they can purchase a house for 80,000 or 50,000 or whatever they'd like to that helps them set up a successful and productive and fulfilling life in the future.

So keep that in mind, what you're approved for, you don't have to go up to that amount, and often I wouldn't recommend it because what you are technically approved for is a high limit. It's probably going to be a little bit taxing on you financially to do that every single month. So something to keep in mind as you move forward.

So number three, how do you actually put this all together and calculate. So we're going to instead of trying to calculate this all by hand or using little formulas, we're simply just going to calculate this with an online tool. So there are a ton of online calculators on calculating mortgages.

I think the best is USMortgageCalculator.org. It has just the right amount of features and it shows you amortization tables, payment, breakdowns, total interest payments, everything like that without being too flashy. So let's dive into an example of us mortgage calculator and see what this would look like for you.

So in USMortgageCalculator.org, we're just going to use the default numbers that they put in. So one thing to note at the top says, the FHA mortgage calculator. Don't worry about it. It applies to every mortgage.

So there they have a home value or purchase price of $350,000, down payment of 12%. This shows the mortgage amount after the down payment, the interest rate, the private mortgage insurance. This will come into play. If we have a down payment that's less than 20%, the amortization period. So this is a 30-year mortgage.

If you want, you can type in a different year. We do like a 15 year. We'll keep it a 30 for now and homeowners expenses. So once I'm expensing would be maybe closing costs or expenses that you're going to put in the property right up front, we're going to put in zero. Here are the property taxes per year. Home insurance per year and HOA fees per month.

One thing to note about this calculator is you can see right here, I have a down payment of 12%, but I can change that to a dollar amount if I want. So I can see that 12% is 42,000 of $350,000. So I can say, all right, here's 12%. Maybe I wanted to put $50,000 down and you can type it in just like that. So we're going to keep it at 12%.

What I love about this calculator is it's really quick. It's easy to type in the information and it's going to show you a great breakdown of everything that's happening with the loan over a period of time.

So after we have all these numbers, it's going to show us our monthly principal and interest payment. So $1,653, then it will show us our property taxes that we entered as well. We also see homeowners insurance, private mortgage insurance, and no HOA fees. So this is our total PITIA payment right here, $2,280. Now, another cool thing this does is this is going to show you a total of all of the payments and then a breakdown of where all these payments were being allocated.

So this is that kind of a mess of, there are a lot of different things moving. How do these all come into play? They're all right here. They give you an actual pie chart or some sort of graph that will show you the breakdown of what this all is going to look like.

So we know up here that our mortgage amount is $308,000. So we see that over the life of the loan, we're paying $308,000 into the principal. Now on top of that, you can see down here, the total interest over the life of the. Is $287,000 along with the taxes, mortgage insurance, and hazard insurance that we paid, it was $178,000.

So you can see that a $350,000 house. It can very easily come up to eight, $815,000 over the life of the loan. So this is a great tool to be able to play around with some numbers in a really easy environment that way you can see what's going to happen over the life of the loan.

So what we can do here is I'm going to go ahead and duplicate this tab and just show you an example of what a 15-year mortgage is going to look like. So over here on this tab, I'm just going to type in 15, and immediately I can see the difference. So this is our 30 year $815,000. Over a 30-year period is being paid to buy $350,000. Whereas with a 15 year, we pay $578,000 over 15 years to buy a $350,000 house. So if you've never seen a table like this before, it can be a little terrifying to see how much it can cost over a long period of time to have a mortgage. Also, rates change right now, 5% depending on where you're looking is going to be fairly standard. I've seen rates all the way down from a three and a half all the way up to a six and a half. So it really depends on a lot of factors, but this is something to keep in mind mortgages cost a considerable amount over a period of time.

So you want to look at what's going to be the most effective way for you to set up your mortgage. So that's a wise investment for you in the future.

The great thing about this tool is if we continue to scroll down, it will show us the payment schedule of everything that's happening with the loan as well. In the tool, you will see this trailing line which is the total balance of our total mortgage. We had a $308,000 mortgage. We can see that on the guide in the green, it's going to be our principal. I will show year one where we started. For example, this is November, so we only had a little, one-month payment right here, but we can see in the first year such a small portion of that total payment actually went to the principal. Most of that payment went into interest. And then here we have taxes, mortgage insurance, and hazard insurance as well.

So something to note as well is you will see the little drop on the trail between your 2023 and 2024. What dropped off here is mortgage insurance. Remember we put less than 20% down. So we carried mortgage insurance. That fell off when we hit that 20% equity mark on the property. So there is a slight reduction in payment, but you can see as we go on with the years, the principal starts to increase, and interest starts to decrease.

With 15 years, we can compare the difference a little bit more. Obviously, this is a shorter-term, but you can see how much more principal we're paying compared to the interest and the life of the loan. So if you can afford a 15 year, the 15 year is one of the better mortgage options to get, to be able to save you money over the life of the loan. But what you want to know with whatever property you're moving into is again, what makes sense.

Are you planning on being in the property for 15 years or for 30 years? Most of the time people are only planning on being in the property for maybe seven years. So keep that in mind as you start looking at interest rates and lenders and how you're setting up and structuring your loan is if you're only going to be in the property for a couple of years, maybe try to save as much money upfront as possible. Or if you're looking at being in the property for a long period of time, then you can start to say, how can we spend more money upfront, hang down, discount points and the rate and a paying in a down payment. That way we can save more money over the life of the loan.

So hopefully this helps you out a little bit, so you can understand what you can afford, what's comfortable for you, and then how to calculate those. Then look a little bit at the effects of the long-term life of the loan and what those costs.

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Only for educational usage. All calculations should be verified independently. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This is not an offer to lend and should not be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate and/or financial advice. Read the full disclaimer here.