When you’re shopping for a house and considering a mortgage loan, establishing what you can afford for house payments can be a lengthy process. You have to run calculations, get updated
How to Determine Your House Payment: The Quick Formula
Dated: February 16 2018
When you’re shopping for a house and considering a mortgage loan, establishing what you can afford for house payments can be a lengthy process. You have to run calculations, get updated payment scenarios from your mortgage company, and determine whether or not you can qualify.
With all these moving parts, we hope it comes as a relief to hear there’s a simpler way to calculate a home payment. This simple solution will be a huge help in a competitive market that doesn’t allow for extended number crunching.
Terms to know
Before we get into the nitty-gritty, it will be helpful to know these two key terms when using our easy house payment formula.
1. House payment, or PITI
PITI is an initialism used to reference the four factors that influence your monthly house payment:
- Principle is the amount borrowed, specifically how much of your loan you’re scheduled to pay off each month.
- Interest is how much it costs to use your loan, and your monthly payment is based on your interest rates.
- Taxes refer to the property taxes rolled into your monthly house payment and are sometimes called an escrow or impound account.
- Insurance is the amount of the mortgage payment that goes toward hazard and fire insurance.
2. Debt-to-income ratio (DTI)
Important for determining how easily you’ll be able to pay off your debts, the DTI is the percentage of your total monthly debt against your monthly income. In math terms, it looks like this:
(PITI + monthly liabilities) ÷ monthly income = DTI
Your monthly liabilities include debt that you currently owe like loans and credit cards.
3. How To Calculate Your Maximum House Payment:
Monthly Income: $5,000.00
Credit Card 1 Payment: $45.00
Credit Card 2 Payment: $25.00
Car Payment: $250.00
Child Support: $300.00
Total Monthly Liabilities $620.00
Most lenders prefer your DTI stays at or under around 46%, so it’s important to consider your other monthly liabilities alongside your PITI when getting a mortgage.
Given a Monthly Income of $5,000, your Maximum House Payment or PITI is calculated as follows:
(Monthly Income - Monthly liabilities) X DTI = Maximum House Payment
$5,000 x 0.46 – $620 = PITI
PITI = $2,300 – $620 = PITI
Maximum House Payment = $1,680
Including Principal, Interest, Property Taxes and Property Insurance
Factors beyond the formula
Our formulas for PITI and DTI are best for a solid estimation, but they’re not exact for every unique situation. Here are some other factors that will affect your monthly house payments:
- Private mortgage insurance (PMI) is added to the Monthly House Payment when you have a down payment under 20%. PMI helps lenders offset the risk of you defaulting on the mortgage.
- Large down payments, on the other hand, will positively influence your borrowing power.
Assets and reserves need to be disclosed to most lenders, and you’ll need two months or more of PITI in the bank to meet their requirements.
* Rafael is a Full-Time REALTOR® and Accredited Luxury Home Specialist who is committed to his clients with honest and old fashioned values of hard work, communication and doing what it takes to get ....
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