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Mortgage rate calculations The affordability of a house depends on the buyer’s debt-to-income ratio. Many lenders place a limit on such ratio at 36%. That is, the buyer’s personal debt, divided by his or her income, must result to a number which is lower than 36%. If the debt-to-income ratio becomes higher than 36%, the loan application may not be approved or the borrower will be given a high interest rates. Buyers who have debt-to-income ratio of lower than 28% will most likely be approved and will enjoy lower interest rates. So how will a buyer know how if he or she can afford the monthly mortgage payments of a certain house? First, the monthly gross income must be multiplied by the maximum value of the debt-to-income ratio, which is 36%. For example, if the monthly gross income is $6,000, the 36% of it is (6,000 x 0.36) equal to $2,160. Second, the total monthly debt payment must be calculated. This can be the total of credit card payments, car payment, and other loan payments. If, for example, the total monthly debt payment is $800, this will be deducted from the previous amount calculated: $2,160 - $800 = $1,360. By taking into consideration the other monthly payments that will come due to the purchase of the house, such as property taxes, home insurance payments and private mortgage insurance, the buyer can afford a home which has a monthly mortgage of less than $1,000. If the house being sold has a higher monthly mortgage rate than the buyer can afford, then it is recommended that other less expensive houses must be considered. |