Instructions, Help, Explanations

Loan Information:

Sale price of the Home:  The amount you would pay for the home.

Down Payment Amount:  The initial amount you pay.

Loan Amount:  The amount you borrow. This is equal to the sale price of the home minus the down payment, and is calculated for you automatically.

Annual Interest Rate:  The annual interest rate the lender charges you for borrowing the loan amount.

Fraction Helper:  The Fraction Helper is optional. If you have been quoted an interest rate of, say, 6⁷/₈, you could use the Fraction Helper to find out that ⁷/₈ is the same as .875. When you select a fraction from the Fraction Helper, the decimal portion of the interest rate is automatically changed to the selected value.

Years to pay off the loan:  Enter the number of years you will be making payments. Negative numbers are automatically changed to positive numbers. The number of months is automatically updated when you change the number of years. You can enter a decimal number of years - but if you do, it will be converted to a number of months, and the number of months will be converted back to a decimal number of years. So the decimal you enter may not be the decimal you get!

Example
If you enter 12.7 years, this translates into 152 months. 152 months translates back to 12.67 years, so 12.67 would be the number you get!

Or, months to pay off the loan:  Sometimes it's easier to enter the number of months you'll be making payments. If you know this number, you can enter it instead of the number of years. The number of years is automatically updated when you change the number of months. The number you enter is rounded to the nearest whole number. Negative numbers are automatically changed to positive numbers.

Loan Payment Amount:  The amount you will have to pay each month for interest and principal on the loan. This value is calculated for you automatically.

Annual Expenses:

Annual Mortgage Insurance:  If your down payment was less than or equal to 5% of the sale price, this is .0090 times the loan amount. If your down payment was over 5%, but less than or equal to 10% of the sale price, this is .0078 times the loan amount. If your down payment was over 10%, but less than or equal to 15% of the sale price, this is .0052 times the loan payment. If your down payment was over 15%, but less than 20% of the sale price, this is .0032 times the loan payment. If your down payment was greater than or equal to 20% of the sale price, this is zero. This value is calculated for you automatically.

Do not confuse mortgage insurance with home insurance! Mortgage insurance is something you pay for to protect the lender in the event you default on your loan. This may sound like a sweet deal for the lender and a raw deal for you, but in fact, mortgage insurance makes it possible for lenders to give you a home loan without requiring a large down payment. In general you can cancel your mortgage insurance once you have paid 20% of the loan or you can show by a property assessment that you have 20% equity in your home. Once you have 20% equity, the lender has a pretty good chance of recouping their investment through a foreclosure sale if you default on the loan. The qualifications for cancelling your mortgage insurance may vary from these general rules. Check with your lender for details, and plan to cancel it just as soon as possible. Apply the extra money to your loan payments, if you can, and over time you'll save a bundle in interest!

Annual Home Insurance:  Separate from mortgage insurance, this is the insurance that covers unexpected losses due to fire, etc. and protects your interest in the property. Enter the yearly amount of property insurance you would expect to pay.

Annual Property Tax:  Enter the yearly amount you can expect to pay for property taxes. Your realtor should be able to give you this information, as it is commonly a part of the MLS listing for the property. You should expect that over time your property tax will increase.

Monthly Expenses:

Auto Loans:  Enter your total monthly loan payments for your vehicles.

Credit Cards:  Enter your total monthly credit card payments.

Student Loans:  Enter your total monthly loan payments on student loans.

Other Loans:  Enter your total monthly payments for any other loans you may have.

Child Support/Alimony:  Enter your total monthly child support and/or alimony payments.

Other Monthly Payments:  Enter the total of any other monthly payments not covered by the above items.

Explanation:

You should qualify for a home loan if both of the following conditions are met:

• Add up the annual expenses (including mortgage insurance, if required) plus 12 loan payments. If this is more than 28% of your total annual household income, you will probably not qualify for the loan.
  
  
• Add up the annual expenses (including mortgage insurance, if required) plus 12 loan payments. Also add 12 times the sum of your monthly expenses. If this is more than 36% of your total annual household income, you will probably not qualify for the loan.
  
  

You can think of the purpose of the calculation in this way: The first calculation determines whether you have enough income to pay for the home and its related expenses. If you do, the second calculation makes sure you don't have so many other debts that it would be difficult for you to add the home expenses into your budget.