- 1 how do discount points affect the cost of a mortgage
- 2 Calculate Effective Mortgage Rates
- 3 how do discount points affect the cost of a mortgage
- 4 It is dangerous to rely on rules of thumb for calculating how long you need to hold a mortgage to make it worthwhile to pay points in exchange for a lower rate. The proper way is to calculate a break-even period that takes account of all costs and benefits, including tax savings and interest opportunity costs.
- 5 How Much House Can You Afford | 2017 Tips to Using Mortgage Affordability Calculators
how do discount points affect the cost of a mortgage
Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage9quot; itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.
WHAT IS A LOAN-TO-VALUE (LTV) RATIO? HOW DOES IT DETERMINE THE SIZE OF THE LOAN?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment.
WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH?
Fixed Rate Mortgages: Payments remain the same for the life of the loan
ARMS linked to a specific index or margin
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.
WHAT ARE THE ADVANTAGES OF 15 - AND 30-YEAR LOAN TERMS?
In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
Equity is built faster because early payments pay more principal.
CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.
ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?
Yes. Lenders now offer several affordable mortgage options, which can help first-time homebuyers, overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.
HOW LARGE OF A DOWN PAYMENT DO I NEED?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.
WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).
WHAT FACTORS AFFECT MORTGAGE PAYMENTS?
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?
A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate "lock-in9quot; which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage and other fees included in the loan.
WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE LOAN?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.
Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.
WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.
Calculate Effective Mortgage Rates
This calculator will compute the effective interest rate of a mortgage when upfront loan costs are included.
In this calculator, the APR is not quite as simple as it appears to be on the surface. When factoring in other variables such as initial loan costs like points and closing fees, the APR shifts subtly to a new figure - and this tool shows you what that actual figure is. When you are quoted a particular interest rate, length of mortgage, and maximum loan amount by a lender, they may discuss with you additional possibilities to shift your financial capabilities in a different direction to make your payments easier and save you money in the end. If you plug those numbers into this calculator you will be presented with a vision of your monthly principal and interest payment that is closer to what the true financing looks like when it is all inclusive of points and closing fees.
There is a slew of questions regarding the points system that is connected to the all important APR. Points are percentages that represent a certain fraction of your total mortgage amount. Two points stand for 2% of your principal, so a total of $1000 out of a $50,000 loan, for example. Points, sometimes called origination fees, broker fees, or loan discount fees, are usually paid in advance and calculated by the lender during the closing meeting after the buyer and seller have put the final touches on the purchasing contract for a home. The closing of your mortgage is the very last step in the home buying process, where money is generally exchanged and contracts are signed and notarized by all involved parties. Points are directly related to the interest rate you end up paying: if you pay points in the beginning, you can get yourself a lower interest rate which will make a decent difference after the life of a 20 year loan. The more points you pay for, the less your APR will be. Conversely, if you pay a higher annual interest rate you will likely not have any points at all. It is essentially a financial and timely tradeoff that will depend on your current financial circumstances and how much free income you have to work with in the first place.
The number of points you have works to determine your effective loan amount as well as your effective monthly payment, but usually only by a small amount. If your borrowed total is $50,000, for example, and you have two points, your effective sum will be $51,000 and this figure is what you will make monthly payments based on. In response, these two theoretical points serve to drive up the annual interest rate to an actual interest rate, points inclusive. So, if you start with a 6% APR and add two points to the initial equation, you will end up with a true interest rate of 6.25%. This drives up the base principal and interest payment from $358 monthly to $365 with the points factored in. In this way, points can make a small difference in the overall picture but a big difference in the initial loan scheduling. They are a smart way of offsetting your beginning costs with your final fees due.
how do discount points affect the cost of a mortgage
"A DCF values a company based on the Present Value of its Cash Flows and the Present Value of its Terminal Value.
First, you project out a company's financials using assumptions for revenue growth, expenses and Working Capital; then you get down to Free Cash Flow for each year, which you then sum up and discount to a Net Present Value, based on your discount rate - usually the Weighted Average Cost of Capital.
Once you have the present value of the Cash Flows, you determine the company's Terminal Value, using either the Multiples Method or the Gordon Growth Method, and then also discount that back to its Net Present Value using WACC.
Finally, you add the two together to determine the company's Enterprise Value."
2. Walk me through how you get from Revenue to Free Cash Flow in the projections.
Subtract COGS and Operating Expenses to get to Operating Income (EBIT). Then, multiply by (1 - Tax Rate), add back Depreciation and other non-cash charges, and subtract Capital Expenditures and the change in Working Capital.
Note: This gets you to Unlevered Free Cash Flow since you went off EBIT rather than EBT. You might want to confirm that this is what the interviewer is asking for.
3. What's an alternate way to calculate Free Cash Flow aside from taking Net Income, adding back Depreciation, and subtracting Changes in Operating Assets / Liabilities and CapEx?
Take Cash Flow From Operations and subtract CapEx - that gets you to Levered Cash Flow. To get to Unlevered Cash Flow, you then need to add back the tax-adjusted Interest Expense and subtract the tax-adjusted Interest Income.
4. Why do you use 5 or 10 years for DCF projections?
That's usually about as far as you can reasonably predict into the future. Less than 5 years would be too short to be useful, and over 10 years is too difficult to predict for most companies.
5. What do you usually use for the discount rate?
Normally you use WACC (Weighted Average Cost of Capital), though you might also use Cost of Equity depending on how you've set up the DCF.
The formula is: Cost of Equity * (% Equity) + Cost of Debt * (% Debt) * (1 - Tax Rate) + Cost of Preferred * (% Preferred).
In all cases, the percentages refer to how much of the company's capital structure is taken up by each component.
For Cost of Equity, you can use the Capital Asset Pricing Model (CAPM - see the next question) and for the others you usually look at comparable companies/debt issuances and the interest rates and yields issued by similar companies to get estimates.
7. How do you calculate the Cost of Equity?
Cost of Equity = Risk-Free Rate + Beta * Equity Risk Premium
The risk-free rate represents how much a 10-year or 20-year US Treasury should yield; Beta is calculated based on the "riskiness" of Comparable Companies and the Equity Risk Premium is the % by which stocks are expected to out-perform "risk-less" assets.
Normally you pull the Equity Risk Premium from a publication called Ibbotson's.
Note: This formula does not tell the whole story. Depending on the bank and how precise you want to be, you could also add in a "size premium" and "industry premium" to account for how much a company is expected to out-perform its peers is according to its market cap or industry.
Small company stocks are expected to out-perform large company stocks and certain industries are expected to out-perform others, and these premiums reflect these expectations.
8. How do you get to Beta in the Cost of Equity calculation?
You look up the Beta for each Comparable Company (usually on Bloomberg), un-lever each one, take the median of the set and then lever it based on your company's capital structure. Then you use this Levered Beta in the Cost of Equity calculation.
For your reference, the formulas for un-levering and re-levering Beta are below:
Un-Levered Beta = Levered Beta / (1 + ((1 - Tax Rate) x (Total Debt/Equity))) Levered Beta = Un-Levered Beta x (1 + ((1 - Tax Rate) x (Total Debt/Equity)))
9. Why do you have to un-lever and re-lever Beta?
Again, keep in mind our "apples-to-apples" theme. When you look up the Betas on Bloomberg (or from whatever source you're using) they will be levered to reflect the debt already assumed by each company.
But each company's capital structure is different and we want to look at how "risky" a company is regardless of what % debt or equity it has.
To get that, we need to un-lever Beta each time.
But at the end of the calculation, we need to re-lever it because we want the Beta used in the Cost of Equity calculation to reflect the true risk of our company, taking into account its capital structure this time.
10. Would you expect a manufacturing company or a technology company to have a higher Beta?
A technology company, because technology is viewed as a "riskier" industry than manufacturing.
11. Let's say that you use Levered Free Cash Flow rather than Unlevered Free Cash Flow in your DCF - what is the effect?
Levered Free Cash Flow gives you Equity Value rather than Enterprise Value, since the cash flow is only available to equity investors (debt investors have already been "paid" with the interest payments).
12. If you use Levered Free Cash Flow, what should you use as the Discount Rate?
You would use the Cost of Equity rather than WACC since we're not concerned with Debt or Preferred Stock in this case - we're calculating Equity Value, not Enterprise Value.
13. How do you calculate the Terminal Value?
You can either apply an exit multiple to the company's Year 5 EBITDA, EBIT or Free Cash Flow (Multiples Method) or you can use the Gordon Growth method to estimate its value based on its growth rate into perpetuity.
The formula for Terminal Value using Gordon Growth is: Terminal Value = Year 5 Free Cash Flow * (1 + Growth Rate) / (Discount Rate - Growth Rate).
14. Why would you use Gordon Growth rather than the Multiples Method to calculate the Terminal Value?
In banking, you almost always use the Multiples Method to calculate Terminal Value in a DCF. It's much easier to get appropriate data for exit multiples since they are based on Comparable Companies - picking a long-term growth rate, by contrast, is always a shot in the dark.
However, you might use Gordon Growth if you have no good Comparable Companies or if you have reason to believe that multiples will change significantly in the industry several years down the road. For example, if an industry is very cyclical you might be better off using long-term growth rates rather than exit multiples.
15. What's an appropriate growth rate to use when calculating the Terminal Value?
Normally you use the country's long-term GDP growth rate, the rate of inflation, or something similarly conservative.
For companies in mature economies, a long-term growth rate over 5% would be quite aggressive since most developed economies are growing at less than 5% per year.
16. How do you select the appropriate exit multiple when calculating Terminal Value?
Normally you look at the Comparable Companies and pick the median of the set, or something close to it.
As with almost anything else in finance, you always show a range of exit multiples and what the Terminal Value looks like over that range rather than picking one specific number.
So if the median EBITDA multiple of the set were 8x, you might show a range of values using multiples from 6x to 10x.
17. Which method of calculating Terminal Value will give you a higher valuation?
It's hard to generalize because both are highly dependent on the assumptions you make. In general, the Multiples Method will be more variable than the Gordon Growth method because exit multiples tend to span a wider range than possible long-term growth rates.
18. What's the flaw with basing terminal multiples on what public company comparables are trading at?
The median multiples may change greatly in the next 5-10 years so it may no longer be accurate by the end of the period you're looking at. This is why you normally look at a wide range of multiples and do a sensitivity to see how the valuation changes over that range.
This method is particularly problematic with cyclical industries (e.g. semiconductors).
19. How do you know if your DCF is too dependent on future assumptions?
The "standard" answer: if significantly more than 50% of the company's Enterprise Value comes from its Terminal Value, your DCF is probably too dependent on future assumptions.
In reality, almost all DCFs are "too dependent on future assumptions" - it's actually quite rare to see a case where the Terminal Value is less than 50% of the Enterprise Value.
But when it gets to be in the 80-90% range, you know that you may need to re-think your assumptions.
20. Should Cost of Equity be higher for a $5 billion or $500 million market cap company?
It should be higher for the $500 million company, because all else being equal, smaller companies are expected to outperform large companies in the stock market (and therefore be "more risky"). Using a Size Premium in your calculation would also ensure that Cost of Equity is higher for the $500 million company.
21. What about WACC - will it be higher for a $5 billion or $500 million company?
This is a bit of a trick question because it depends on whether or not the capital structure is the same for both companies. If the capital structure is the same in terms of percentages and interest rates and such, then WACC should be higher for the $500 million company for the same reasons as mentioned above.
If the capital structure is not the same, then it could go either way depending on how much debt/preferred stock each one has and what the interest rates are.
22. What's the relationship between debt and Cost of Equity?
More debt means that the company is more risky, so the company's Levered Beta will be higher - all else being equal, additional debt would raise the Cost of Equity, and less debt would lower the Cost of Equity.
23. Cost of Equity tells us what kind of return an equity investor can expect for investing in a given company - but what about dividends? Shouldn't we factor dividend yield into the formula?
Trick question. Dividend yields are already factored into Beta, because Beta describes returns in excess of the market as a whole - and those returns include dividends.
24. How can we calculate Cost of Equity WITHOUT using CAPM?
There is an alternate formula:
Cost of Equity = (Dividends per Share / Share Price) + Growth Rate of Dividends
This is less common than the "standard" formula but sometimes you use it for companies where dividends are more important or when you lack proper information on Beta and the other variables that go into calculating Cost of Equity with CAPM.
25. Two companies are exactly the same, but one has debt and one does not - which one will have the higher WACC?
This is tricky - the one without debt will have a higher WACC up to a certain point, because debt is "less expensive" than equity. Why?
• Interest on debt is tax-deductible (hence the (1 - Tax Rate) multiplication in the WACC formula).
• Debt is senior to equity in a company's capital structure - debt holders would be paid first in a liquidation or bankruptcy.
• Intuitively, interest rates on debt are usually lower than the Cost of Equity numbers you see (usually over 10%). As a result, the Cost of Debt portion of WACC will contribute less to the total figure than the Cost of Equity portion will.
However, the above is true only to a certain point. Once a company's debt goes up high enough, the interest rate will rise dramatically to reflect the additional risk and so the Cost of Debt would start to increase - if it gets high enough, it might become higher than Cost of Equity and additional debt would increase WACC.
It's a "U-shape" curve where debt decreases WACC to a point, then starts increasing it.
26. Which has a greater impact on a company's DCF valuation - a 10% change in revenue or a 1% change in the discount rate?
You should start by saying, "it depends" but most of the time the 10% difference in revenue will have more of an impact.
That change in revenue doesn't affect only the current year's revenue, but also the revenue/EBITDA far into the future and even the terminal value.
27. What about a 1% change in revenue vs. a 1% change in the discount rate?
In this case the discount rate is likely to have a bigger impact on the valuation, though the correct answer should start with, "It could go either way, but most of the time. "
28. How do you calculate WACC for a private company?
This is problematic because private companies don't have market caps or Betas. In this case you would most likely just estimate WACC based on work done by auditors or valuation specialists, or based on what WACC for comparable public companies is.
29. What should you do if you don't believe management's projections for a DCF model?
You can take a few different approaches:
• You can create your own projections.
• You can modify management's projections downward to make them more conservative.
• You can show a sensitivity table based on different growth rates and margins and show the values assuming managements' projections and assuming a more conservative set of numbers.
In reality, you'd probably do all of these if you had unrealistic projections.
30. Why would you not use a DCF for a bank or other financial institution?
Banks use debt differently than other companies and do not re-invest it in the business -they use it to create products instead. Also, interest is a critical part of banks' business models and working capital takes up a huge part of their Balance Sheets - so a DCF for a financial institution would not make much sense.
For financial institutions, it's more common to use a dividend discount model for valuation purposes.
31. What types of sensitivity analyses would we look at in a DCF?
• Revenue Growth vs. Terminal Multiple
• EBITDA Margin vs. Terminal Multiple
• Terminal Multiple vs. Discount Rate
• Long-Term Growth Rate vs. Discount Rate
And any combination of these (except Terminal Multiple vs. Long-Term Growth Rate, which would make no sense).
32. A company has a high debt load and is paying off a significant portion of its principal each year. How do you account for this in a DCF?
Trick question. You don't account for this at all in a DCF, because paying off debt principal shows up in Cash Flow from Financing on the Cash Flow Statement - but we only go down to Cash Flow from Operations and then subtract Capital Expenditures to get to Free Cash Flow.
If we were looking at Levered Free Cash Flow, then our interest expense would decline in future years due to the principal being paid off - but we still wouldn't count the principal repayments themselves anywhere.
It is dangerous to rely on rules of thumb for calculating how long you need to hold a mortgage to make it worthwhile to pay points in exchange for a lower rate. The proper way is to calculate a break-even period that takes account of all costs and benefits, including tax savings and interest opportunity costs.
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"Re your column on 'How Much Is a 1/4 Percent Rate Reduction Worth?', as a mortgage broker of 20-years standing, I want to add a simple explanation that I always give to my clients. On a $200,000 loan, a 1/4% lower rate reduces the monthly payment by about $33 a month whereas 1.5 points amounts to $3,000. Dividing 3,000 by 33 you get 91 months you have to wait to break even…Most people see the light and opt out of doing it."
Break-Even Periods For Paying Points Based on Rules of Thumb Can Be Far Off the Mark
The broker quoted above is referring to a case where a borrower who had previously agreed to pay 6.75% on a 30-year fixed-rate mortgage, was offered 6.50% for an additional 1.5 points. The broker divided the additional $3,000 in points by the $33 saving in the monthly payment from the lower rate to determine a breakeven period of 91 months. What's wrong with that?
Proper Calculation of the Break-Even Period For Paying Points
The breakeven period is the period over which the cost to the borrower would end up the same whether the borrower took the high points/low rate mortgage or the low points/high rate mortgage. To calculate it properly, the cost must includes points, monthly payments, the lost interest earnings on both the points and the monthly payments using the borrower's investment rate, less tax savings and less the reduction in the loan balance.
How Much House Can You Afford | 2017 Tips to Using Mortgage Affordability Calculators
2017 Guide: How Much House Can You Afford and the Best Mortgage Affordability Calculator to Use
Are you fed up of paying for your landlord’s mortgage, and are you thinking about how much mortgage you can afford? Dreaming about how much house can you afford is exciting, but it’s also daunting. We are here to guide you along the way to answering the questions you might have including:
- How much house can I afford?
- What mortgage can you afford?
- What is the best mortgage affordability calculator?
- What is the usefulness of a down payment calculator?
When it comes to your own estimates of how much mortgage can you afford, you might be going on rule-of-thumb basics that you heard from a family member or on a news report—some say 2.5 times your salary, some say 4.
So you may have answered your own question, “How much house can I afford?” by multiplying your salary by three and are spending your spare time online looking at houses of that amount.
Rules of thumb are helpful, but when it comes to what mortgage can you afford, there are a few more factors that you should consider.
In this article, we will bring you through the good, the bad, and the ugly, so you will have a clear idea of how much mortgage can you afford and guide you through the best mortgage affordability calculator and down payment calculator for you.
How Much House Can You Afford? Where to Start
It is an exciting time for any person or couple if you are starting to look at what mortgage can you afford. It can be confusing when you start digging into it—you thought the mortgage affordability calculator would spit out the magic number, but you’re already confused by interest rates and insurance and more.
Don’t be disheartened if the answers to how much house can you afford are initially confusing. When you take the time to read through and understand the factors behind what mortgage can you afford, you will be in a strong, confident position.
So let’s dig in and get down to it—how much mortgage can you afford? If you break it down to the broadest issues, how much of a mortgage can you afford will depend on these three factors:
Most banks and many broker sites have a mortgage affordability calculator that will use these numbers to come up with a number for you. We will look into the best mortgage affordability calculator for you in the next section.
When lenders are calculating how much mortgage can you afford, they take into account a huge number of factors, but the basic logic is that what mortgage can you afford should allow you to continue repaying current debts, continue to reach your savings goals, as well as having a little bit left aside for property repairs and/or emergencies.
So thinking how much home can I afford based on income is a good place to start, but no matter how much you earn, there are other factors that the lender will be taking into account before they tell you how much can you afford in a mortgage. This might include:
- Student loans or other debts
These are just a few of the things lenders are looking at. In fact, banks and other lenders will be asking you a lot of personal questions. So when it comes to approaching a bank about how much of a mortgage can you afford, you should be prepared for sharing a lot of information.
When you are just looking for an idea of how much mortgage can you afford, an impersonal mortgage affordability calculator will be helpful. As you proceed deeper into the process of how much house can I afford, it is good to build a relationship and feel comfortable and happy with the bank you are dealing with.
The calculations of how much can you afford in a mortgage can be done with a co-borrower. The potential of how much of a mortgage can you afford can open up to new heights if you consider buying with a co-borrower. This could be:
If your rule-of-thumb calculations have left you feeling hopeless, you might know someone else who has the same ambitions as you and would be excited about coming together to see how much house can you afford together.
Another way to look outside the box is to think broadly about how much home can I afford based on income. Remember that income goes beyond your salary. Maybe you are getting alimony or some payments relating to children, perhaps you have an extracurricular online craft shop. Wherever there is money coming in, it will make a difference to how much of a mortgage can you afford.
However, as mentioned, even if you have a really promising income, if you have a lot of debt, this will also be considered when calculating how much house can you afford. Lenders will use an income-to-debt ratio as part of their formulas, which will look further than just, “How much home can I afford based on income?”
The interest rates globally, nationally, and locally will also have an impact on how much can you afford in a mortgage. This is where you will need to look very closely at the numbers offered by mortgage affordability calculator, which we will guide you through below.
Now, here is a helpful list of factors that you forgot about when you looked at how much home can you afford based on income. We recommend that you consider all of these factors to give you a true idea of how much house can you afford, as the mortgage is just the start!
- All income (salary and other money coming in)
- Income taxes (federal/state/tax)
- Homeowner association dues
How Much Mortgage Can You Afford? Could vs. Should
Ten years ago, when there was more money in the world, banks used different ways to calculate how much mortgage can you afford. With more money around, banks were taking more risks and not taking into account many of the financial factors that they do now when they tell you what mortgage you can afford.
The key word we would like you to take away from this article is afford. Bank of America has set a good guide to this, and we think they have some excellent advice for those of you looking at how much can you afford in a mortgage. Think about how much you should borrow, rather than how much you could borrow.
The lessons that we have learned from the property crash is that banks and lenders were giving people far more money than they could afford to repay. Don’t think how much of a mortgage can I get, think—how much of a mortgage can you afford.
This will put you into a powerful position when you are shopping around for what mortgage can you afford. If you are in the confident position of knowing how much of a monthly repayment you can comfortably make, you will be able to make better decisions when banks are trying to tell you how much mortgage can you afford.
Bank of America gives the really solid advice that if you think should, not could, this will make you:
So, do your budgeting (we’ll guide you through finding a mortgage affordability calculator for you below). If, when you are asking banks how much mortgage can you afford, the answer is much higher than you had budgeted, take a step back and look at it.
Learn the lessons of the people of the economic boom who assumed that banks were giving out mortgages based on a real calculation of how much house can you afford. Don’t presume that the bank is looking out for you and how much can you afford in a mortgage—make those confident calculations yourself. Now let’s show you how!
Mortgage Affordability Calculator: Which One Should You Use?
A good place to start when researching how much house can you afford or what mortgage you can afford is to use a mortgage affordability calculator. There are a lot of choices when it comes to finding the right mortgage affordability calculator for you.
If you use a search engine such as Google and enter search terms such as:
- How much mortgage can you afford?
- How do I find a mortgage affordability calculator?
- How much of a mortgage can you afford?
Some of the top sites offering information on how much mortgage can you afford include:
Some of the top bank sites that come up when looking at how much house can you afford include:
Below we will have a quick look at the sites and their usefulness when it comes to finding out what mortgage can you afford.
This site is helpful in giving a really broad understanding of the factors that affect how much home can I afford based on income. The calculator is easy to understand and use, and it nicely breaks down the costs beyond just what mortgage you can afford while giving a broader view of the costs involved.
This site seems to really be on the side of the buyer, not hiding any of the forgotten costs that can distort how much home can I afford based on income. These were discussed earlier including property taxes, homeowners’ insurance, mortgage insurance, and closing costs.
Some other great features the site has which helps users to understand how much house can you afford include:
Furthermore, Zillow Group does a help review of the costs of buying vs. renting, so you can step back from thinking about how much mortgage you can afford and have a look about whether buying is really the best option for you.
Bankrate offers a simple, easy-to-use tool with their mortgage affordability calculator, which will not only tell you how much can you afford in a mortgage, but give you a clear break down of the money that is going in and out of your account on a monthly basis.
Before you get the magic number on what mortgage can you afford, may have to do a little bit of digging before you can fill in every element of the calculator, such as having an idea about interest rates, how much homeowners’ insurance will be, various tax costs, and a decision on the length of the loan you are willing to take.
In this way, this particular mortgage affordability calculator is more advanced than others, but it will put you in a strong position of understanding the elements that will affect how much of a mortgage can you afford.
Bankrate also has some really useful alternative calculators including:
An interesting aspect of the Smart Asset tool is that it breaks down the costs by your location and also includes handy hidden extras such as closing costs and cash reserves when it helps you find out how much can you afford in a mortgage.
It uses helpful imagery to help users understand the costs and, as well as helping you calculate how much of a mortgage can you afford, it has other helpful data such as:
- Average home costs in your area
The image above is the first thing you will see when you visit the Scotiabank mortgage affordability calculator. Although it may seem confusing, it is good that the user is forced to understand how mortgages work. It can be tedious and difficult to get your head around, but it is very important to have a solid understanding of these terms so that you can make an informed decision about what mortgage you can afford.
But don’t be deterred by big words. Again, like Bankrate, it will be helpful to users to have a basic understanding of mortgages and the terms of the loan, especially the length of the loan. In other words, this mortgage affordability calculator will be looking at what mortgage you can afford, rather than how much house can you afford.
This mortgage affordability calculator will make you think about every single cost, including heating costs! It leaves no stone unturned in examining affordability.
Conclusion: How Much House Can You Afford and the Best Mortgage Affordability Calculator for Your Needs
At AdvisoryHQ, we know that this is a scary and exciting time for you if you are starting the process of calculating what mortgage you can afford. Our top tips for guiding you through this process are:
- Estimate how much can you afford in a mortgage on actual affordability, not trying to get the biggest mortgage that a bank will offer you.
The great news is that there are great tools, sites, and banks that want to help you to find out the answer to how much house can I afford. Best of luck with your search!
Reasonable efforts have been made to present accurate information, however all info is presented without warranty. Review AdvisoryHQ’s Terms for details. Also review each firm’s site for the most updated data, rates and info.
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