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Home Loan Guide

Step 3

Determining your Affordability

After you have identified the loan type that best fits your needs, you may want to call some lenders to find out the interest rates for the loan programs that you are interested in. Based on the interest rate information, you can determine the price range of home that you can afford and your monthly house payment. Here are the ways to help you to figure out your affordability.

A. How much monthly house payment can I afford?

Even though each lender may use various factors to determine an applicant's maximum affordable monthly house payment, it is generally agreed that the maximum affordable monthly house payment should not exceed one-third of your gross monthly income.

Gross Monthly Income
(Yourself + co-borrowers)		  $
Times 33%   x 0.33
Maximum Affordable Monthly
House Payment		 =$

The affordable monthly house payment covers monthly mortgage interest, reduction of principal, as well as pro-rated property tax and insurance premium. Although you may not actually pay for property tax and insurance premium every month, lenders will still include those expenses as part of your monthly obligations when determining the loan amount you can afford.

B. What is the maximum loan amount that I can obtain?

You can simply refer to the chart below for the maximum affordable loan amount that you can borrow. First choose the appropriate interest rate along with the maximum affordable house payment that is closest to the amount you calculated above. Cross-index the two figures on the chart to find the maximum loan factor. Multiply the maximum loan factor by one thousand (1,000) to determine the maximum loan amount that you can obtain.

MAXIMUM LOAN FACTOR CHART*

Maximum Affordable Monthly House Payment**
      $1000 $1200 $1400 $1600 $1800 $2000 $2200 $2400 $2600
10% 114 137 160 182 205 228 251 273 296
9% 124 149 174 199 224 249 273 298 323
8% 136 164 191 218 245 273 300 327 354
7% 150 180 210 240 271 301 331 361 391
6% 167 200 234 267 300 334 367 400 434
5% 186 224 261 298 335 373 410 447 484
4% 209 251 293 335 377 419 461 503 545

* Maximum affordable loan amounts are based on a 30-year fixed rate loan since it is the most popular loan program. If you would like information on other loan programs, please stop by United Commercial Bank.
** Property taxes and insurance payments are not included.


Maximum Loan Factor
(Refer to the chart above)		   $
Times 1,000   x 1,000
Maximum Affordable Loan Amount =$

C. What is the maximum home price range that I can afford?

The price range of home that you should look for is equal to your down payment plus the maximum loan amount that you obtain.

Available Down Payment

   $
Plus Maximum Affordable Loan Amount +$
Maximum Affordable Home Price =$

For example, if $1,600 is the maximum monthly house payment that you can afford and the interest rate is 8%, then the maximum loan amount that you can obtain is $183,000. If you have $40,000 as down payment, the maximum affordable home price range will be $223,000.

D. Exactly how much will I pay each month?

Once you have a specific purchase price, interest rate and down payment, then you can use the tables below to calculate your total monthly house payment. The table below will help you to find out the monthly principal and interest portion of your house payment. Interest rate factor is obtained by referring to the corresponding interest rate at Table B.

TABLE A
Cost of Home
   $
Less Down Payment
  -$
Loan Amount
 =$
Divided by 1,000 / 1,000       
 

 =$
Times Interest Rate Factor
(Refer to Table B)		   x
Principal and Interest Portion
of Monthly Payment		 =$ (a)
TABLE B
Interest Rate Factor
4.00% 4.78
4.50% 5.07
5.00% 5.37
5.50% 5.68
6.00% 6.00
6.50% 6.32
7.00% 6.66
7.50% 7.00
8.00% 7.34
8.50% 7.69
9.00% 8.05
9.50% 8.41
10.00% 8.78

In addition, you need to include property tax and insurance premium as your monthly obligation even through you do not have to pay on a monthly basis. The follow table helps you to calculate the monthly property tax and insurance premium.


TABLE C
PROPERTY TAX
Cost of Home
   $
Times 1.25%   x 0.0125
Annual Property Tax
 =$
Divided by 12 / 12
Monthly Property Tax
 =$ (b)


INSURANCE PREMIUM
Loan Amount
  $
Times 0.35%  x 0.0035
Annual Insurance Premium
  =$
Divided by 12  / 12
Monthly Insurance Premium
 =$ (c)
Add (b) + (c)  
Monthly Property Tax
& Insurance Premium Payment 		=$ (d)

TABLE D
Principal and Interest Portion
of Monthly Payment (a)		   $
Monthly Property Tax and
Insurance Premium Payment (d)		 +$
Total Monthly House Payment
(a) + (d)		 =$
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Most lenders require 20% of the home purchase price as a down payment. However, some lenders offer programs for first time home buyers that require only 5% down payment. If you require more than 80% home financing from your lender, then your loan-to-value ratio is higher than 80%. In that case, you may need to purchase Private Mortgage Insurance (PMI). The amount of PMI required will affect how much you can borrow and your monthly obligation. Your loan agent will be able to provide a more detailed information on PMI.

Don't forget that you will have to set aside funds for closing costs. In general, closing costs are approximately equal to 4% of the loan amount. These costs include the appraisal fee, credit report fee, title insurance premium, escrow fee, processing fee, as well as loan points. Your lender should give you an estimate of closing costs when you apply for a loan.