Equation for mortgage payments

M = P[r(1+r)^n/((1+r)^n)-1)]

 

M = the total monthly mortgage payment.

P = the principal loan amount.

r = your monthly interest rate. Lenders provide you an annual rate so you’ll need to divide that figure by 12 (the number of months in a year) to get the monthly rate. If your interest rate is 5%, your monthly rate would be 0.004167 (0.05/12=0.004167)

n = number of payments over the loan’s lifetime. Multiply the number of years in your loan term by 12 (the number of months in a year) to get the number of payments for your loan. For example, a 30-year fixed mortgage would have 360 payments (30x12=360)

 

Determine how much house you can afford

If you’re not sure how much of your income should go toward housing, follow the simple calculation of 28/36 percent rule. Most financial advisers agree that people should spend no more than 28 percent of their gross income on housing (i.e. mortgage payment), and no more than 36 percent of their gross income on total debt, including mortgage payments, credit cards, student loans, medical bills and the like.

Example:

Mary makes $60,000 a year. That’s a gross monthly income of $5,000 a month.

$5,000 x 0.28 = $1,400 total monthly mortgage payment (PITI)

Mary’s total monthly mortgage payments (including principal, interest, taxes and insurance) shouldn’t exceed $1,400 per month. That’s a maximum loan amount of roughly $253,379.

You can qualify for a mortgage with a DTI ratio of up to 50 percent for some loans, but you might not have enough wiggle room in your budget for other living expenses such as retirement, an emergency fund, and discretionary spending. When seeking a loan commitment, Lenders won’t take those budget items into account for a loan, so it’s your responsibility to factor the extra expenses into account when it comes to determining your household budget.

Depending on where you live, your annual income could be more than enough to cover a mortgage -- or it could fall short. Knowing what you can afford can help you take financially sound next steps. The last thing you want to do is jump into a 30-year home loan that’s too expensive for your budget, even if a lender willing to loan you the money.