Okay, you have finally come to your senses and realized how foolhardy it is to continue paying rent. No more paying out of your pocket so that someone else can purchase their house on your hard-earned dollars! Now that you have looked at houses with your agent and have narrowed your scope to one that meets your criteria, are you wondering if that price tag is something you can work with and comfortably afford each month? Do you just wing it and make an offer with the hope you can make the monthly mortgage payments without any idea of a ballpark figure or do you play it smart by getting a narrowed number down before you have your agent write an offer?
The latter option is most common for a majority of people looking to buy a home. Any serious buyer would not want to go into the home-buying process only to face a big surprise later that could be a disappointing one especially if it could be easily be avoided by doing a little math in the beginning.
“How much house can I afford to buy?” is a frequent question asked by clients. “Should I wait awhile before submitting an offer?” is also often heard. To help answer these questions – we need to spotlight interest rates and the significant impact just an increase of a percentage or two can have on your monthly mortgage payments. It’s quite tremendous really. Come on, go ahead and use the mortgage calculator for yourself. Enter a moderate 2% increase in the interest rate for the house you are thinking of buying to ascertain the difference in monthly mortgage expenses incurred.
In interest of time, let’s use this simple scenario to depict a purchase.
Using a situation where the sales price of a home is $300,000 excluding taxes and insurance, and based on a 30-year mortgage with a 4.5% interest rate, the monthly mortgage obligation is approximately $1,520 each month.
Thinking to wait awhile? Maybe thinking you are better off waiting – using the time instead to save up some extra money for a larger down payment may seem like a good idea. But is it? By you waiting, the market does not…interest rates keep inching up – even a slight increase can have a big impact on your wallet.
Using the same home sales price as before of $300,000, and again not including taxes or insurance, based on a 30-year mortgage, now with the interest rate having increased slightly to 6.5% (it’s just a two percent hike) equates to a much larger monthly mortgage payment of $1,896. That’s a whopping $376 a month additional cost!
An important take away from this lesson is, “Do not wait!” – Interest rates typically go in which direction? They are going up, not down. Back in the 80s you may remember or heard that rates were exorbitant and ridiculously high. Not tall tales – unfortunately for the U.S. the situation at the time was all too real. Rates were averaging 16% – 18%! It is unfathomable now for anyone to be expected to pay $4,277 per month 30 years ago for the same $300K house. In spite of the gargantuan interest rates, back then people were still buying homes because it was still considered a much better investment than renting from a landlord.
Consider yourself fortunate that interest plunged to an all-time low in recent years. Surprising even the financial experts, the rates have stayed at remarkably low levels for the past few years but have definitely started to show movement upward. Take advantage of the opportunity to buy now before the pendulum rights itself which it has begun to do. The obvious benefits are clear – you would be getting much more house for your money. Plain and simple.
So back to reality and present-day. How do you figure out what your mortgage payment might look like when you’ve zoomed in on your future home? People do not generally carry around in their pockets mathematical formulas for just such an occasion – that includes your real estate agent who is not a professional lender or mathematician. The good news is that there is an uncomplicated way to get an answer by using a mortgage calculator. By plugging in the information when using the mortgage calculator - the approximate monthly mortgage payment will be determined for you.
What to know is the purchase (sale) price. How much are you applying towards a down payment? Once the down payment is factored in – you then have a number to work off of. Add in any additional expenditures such as homeowner’s insurance (approximately 1%), closing costs (approximately 3%) needing to be borrowed and the like. Then apply the current interest rate (this will not be exact number since it continually fluctuates), then consider the principal (approximately 1.2%). All of these numbers combined results in new figure which is the loan amount you are requesting your lender to approve.
Sound complicated?? Exactly! Even with the help of coffee – the problem-solving formula may not be that enticing for you to work out. To save confusion and headache – use the mortgage calculator we are making available here for your use. Just remember to add yearly taxes and home insurance costs (total of both divided into 12 months). Go ahead - put it work. You will be glad you did.
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