How to Determine Your House Payment: The Quick Formula

mortgage payment

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

Most lenders prefer your DTI stays at or under 45%, so it’s important to consider your other monthly liabilities alongside your PITI when getting a mortgage.

The Basic House Payment Calculations Most Lenders Won’t Share

Now that you’re familiar with PITI and DTI, you’re ready for this simple truth: for each $100,000 you borrow, expect a monthly mortgage payment, or PITI, of $725.

It’s true! In most cases, your principal, interest, property taxes, and home insurance for $100,000 will come out to about $725 each month. Here’s a handy table for reference:

Amount Borrowed Approximate PITI
$100,000 $725
$200,000 $1,450
$300,000 $2,175
$400,000 $2,900
$500,000 $3,625

 

You can easily add half of $725 (that’s $362.50) if you’re trying to calculate for an extra $50,000. Or you can divide the loan amount by $100,000 and multiply the result by $725 to get the estimated PITI for your loan.

The Ins and Outs of Calculating PITI

Let’s look at an example. Say you want to buy a $350,000 home. You want to know whether the payment is affordable and whether you’ll meet your lender’s debt ratio thresholds.

Pretend you already have a 20% down payment ready, which is $70,000 for a $350,000 home. So in total, you’ll be borrowing $280,000. Divide that by $100,000 and you get 2.8. Using this information, the basic house payment formula will look like this:

$725 x 2.8 = $2,030

To spell it out, we know that when you borrow $100,000, your PITI will be about $725 per month. When we divide $280,000 by $100,000, we get 2.8. Similarly to how multiplying $100,000 by 2.8 will result in the full loan amount, multiplying $725 by 2.8 will give us the total PITI amount. So the total PITI would be $2,030 per month.

The Ins and Outs of Calculating DTI

Once you’ve calculated the PITI, make sure you’ve got a debt-to-income ratio a lender will approve of. Remember, the highest DTI most lenders will allow is 45%. Continuing with our example and using an income of $4,750, here’s how to find the DTI for a $2,030 PITI if you have no other monthly liabilities:

$2,030 ÷ $4,750 = 42.74%

As you can see, you simply divide the PITI by your income. In this case, the result is 42.74%, which is low enough to possibly qualify for a loan.

The Application of Monthly Liabilities

Remember to include any other monthly liabilities you have when you calculate your DTI. Let’s see if you can still reasonably afford the house with hypothetical monthly liabilities.

Pretend you have a car lease payment of $300 a month and credit card payments of $80 a month. This changes our previous DTI formula like so:

($2,030 + $300 + $80) ÷ $4,750 = 50.74%

With those debts, you would have a 50.74% DTI, which means you likely wouldn’t qualify for that large of a loan. That’s a rather different situation, so don’t forget to include your monthly liabilities when calculating DTI.

Personalizing Your DTI

Your monthly income and expenses may be very different from our hypothetical scenario. Try plugging in your PITI with the formula below to get your personal DTI, and make sure it’s below 45%:

(PITI + monthly liabilities) ÷ monthly income = DTI

Remember, even if your DTI is below 45%, you need to consider your lifestyle and other living costs when deciding on a home. Are you willing to be house poor for a large mortgage, or will you be just as happy with less home and more spending money each month? The choice is up to you!

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) comes into play 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.
  • Credit scores can influence interest rates, and if your score is below 620, you may not qualify for a home loan. Every month, check your credit scores for free on Credit.com to see where you stand.

If you’re thinking of buying a home or are currently preparing to purchase one, check out some of our other mortgage tips and tricks.
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The post How to Determine Your House Payment: The Quick Formula appeared first on Credit.com.

4 Reasons You Should Make Biweekly Mortgage Payments

The vast majority of people make monthly payments on their mortgage either until they sell their property or the mortgage balance has been repaid. Like the beige paint on the walls in your apartment, monthly payments are fine, but maybe there’s a more appealing alternative. One choice is to split your mortgage payment in half, paying every two weeks instead of making one lump-sum payment each month.

Biweekly mortgage payments could actually save you more in the long term, says Jim Lestitian, senior loan officer at Federated Mortgage Corp.: “This is a great and easy way to prepay your loan (shorter term) and reduce the amount of interest paid over the term of the loan.”

When you pay off the principal more quickly, less interest accrues, and you also reduce the amount of time it will take you to pay back the loan. When biweekly mortgage payments are set up properly, it’s possible to accomplish just that.

In this post, we’ll break down the pros of making biweekly mortgage payments and show how this strategy differs from making additional mortgage payments.

4 Benefits of Biweekly Payments

  1. You’ll gain equity in your home a lot faster

Arguably the most valuable benefit of biweekly payment is that you can gain more equity in your home. Equity accumulates more quickly when you pay twice monthly, because the money you borrowed from the bank has less time to accrue interest.

Why does equity matter?

When you buy a house, the ultimate goal is to live in your home without owing the bank any more money. The amount of ownership you have in a home also fluctuates constantly with the current market value. The difference between the current market value of your home and your mortgage is called equity. Therefore, when your mortgage is completely repaid, the total value, or equity, in the house belongs to you. If you sell your house before your mortgage is repaid, some or all of the proceeds from your sale are used to repay the outstanding mortgage balance.

  1. You’ll pay less interest over time

When you first take out a mortgage, the bank gives you a fixed or variable interest rate. This is the “rent” the bank will charge, and it is typically applied to your balance daily. Since your “rent” is charged daily, you want to spend as few days as possible “renting” the bank’s money. In other words, pay back the principal of the mortgage as quickly as possible to reduce your overall interest expense.

Biweekly mortgage payments help to reduce your interest expense because instead of making one payment against interest and principal each month, you’re making two. While the two separate payments are individually smaller, they both have a more significant impact, because each payment slightly reduces the amount of principal. So, if less principal means the bank can charge less “rent,” then the total “cost” of your mortgage will be reduced with biweekly payments.

  1. You’ll pay off your mortgage faster

The third rider on this tandem bicycle of home financing is duration, or the length, of your mortgage. Most often, mortgages are based on 15- or 30-year terms. However, when biweekly payments are made, your mortgage’s principal is reduced more quickly, so less interest is charged. As a result, you simply won’t need the full term of your loan to pay back the balance.

  1. The secret extra payments

Why the emphasis on biweekly payments, rather than twice-monthly payments?

What is 52 divided by 2? OK, what is 12 times 2? These two problems produce two different numbers, don’t they? By making a payment on your mortgage every two weeks, you’ll make an additional two payments over the course of a year.

The inherent benefits of the secret extra payments compound the three perks listed above: you’re going to have a lower interest expense, by chipping away at your principal more quickly, thereby shortening the amount of time you will need to pay off the balance.

Though, just as there’s more than one way to build a house, there’s a second approach to the 13th payment: additional payments toward principal.

Biweekly Payments vs. Additional Payments

Biweekly payments are not your only option for a shorter, more inexpensive mortgage. Additional payments are a great alternative and applicable to any loan. An additional payment is entirely separate from your total monthly payment and then applied directly to principal. An additional payment can also be any amount you wish, made with any frequency that suits your budget.

Additional payments are totally within your control. In the event that biweekly payments are unavailable or not in your best interest, nothing is stopping you from saving one or more months of mortgage payments (a good idea regardless) and then contributing that balance directly to principal. This approach will simulate the secret extra payments created by biweekly payments, but without the need to adopt a biweekly structure.

Similar to biweekly payments, additional payments will reduce your total interest expense and loan duration. When you’re devoting additional cash to accelerate the repayment of a loan, however, you must consider if this is the best use for your money. For instance, the amount of your additional payment could be used to pay other debts, grow more liquid investment accounts, or increase your emergency fund. These are important considerations because you don’t want to find yourself in a position where you need money that is inaccessible due to being tied up in your home.

When you make an additional payment, be sure to call your lender and tell them to apply it to the principal. You would never want to find yourself in a position where you’ve sacrificed the benefits of an additional payment due to a clerical error by a bank employee.

4 Questions You Must Ask Before Signing Up for Biweekly Mortgage Payments

  1. Are biweekly payments available with my lender?

Just as every landlord won’t offer the same amenities, all lenders won’t offer the option to make your mortgage payments on a biweekly schedule rather than monthly installments. Since interest rates do not vary significantly from one lender to the next, most often this payment structure is used as an additional selling point to entice a potential borrower. So why would a lender not offer a biweekly payment structure to its borrowers?

Biweekly payments are more complicated to administer, feasibly doubling the amount of work on the part of the lender. In addition to being more labor intensive, biweekly payments also generate less income for the lender over the lifetime of the loan. Remember, a mortgage is just another product offered by a lender, so when you make biweekly payments, you’re essentially receiving a discount on the total price of your mortgage.

If your lender does not offer the option of a biweekly payment structure, third-party vendors do exist to fill the gap. These companies simulate biweekly payments by coordinating with your lender to fulfill your monthly mortgage payment on your behalf. Then, you make biweekly payments to the third-party vendor, most often with the addition of an initial and/or ongoing fee.

  1. Are there additional fees associated with a biweekly payment structure?

Since a biweekly payment structure means more work for the lender, many lenders charge fees to enroll. Lestitian often sees lenders or third-party vendors apply a $200 to $400 fee to establish a biweekly payment structure and/or charge an ongoing monthly transaction fee. Therefore, unless you are going to save more in interest by making biweekly payments than you’ll pay in fees, it probably doesn’t make sense to pay biweekly.

  1. When will my lender apply my second payment to my mortgage balance?

Lenders don’t always treat biweekly mortgage payments the same. Some lenders will apply your biweekly payments to your mortgage balance as soon as your payments are received. Other lenders will simply hold your first payment until your total payment has been received.

If your lender is not applying your biweekly payments immediately, there is no point in signing up for biweekly payments. Stick to the usual monthly payment or consider refinancing with a lender who will honor extra payments. The benefit of biweekly payments is only realized if the payments are applied to your mortgage balance immediately.

  1. How does my lender calculate interest?

Your bank will calculate the interest due on a daily, weekly, or monthly basis. This detail is important to note because it dictates how much value you will be able to derive from making biweekly mortgage payments.

If interest is calculated daily, then you will save 14 days of interest expense with every biweekly payment. Similarly, if interest is calculated weekly, you will save two weeks of interest expense, with every biweekly payment. The lynchpin for biweekly payments is if interest is calculated monthly, which is very rare. If this is the case, however, you will not realize any additional benefit by making biweekly instead of monthly payments. So you’re better off sticking to once-a-month payments.

The Bottom Line

Biweekly payments, when structured properly, are a great way to shorten the duration and lower the interest expense of your mortgage, all while enabling you to build equity in your home more quickly. Though remember that the devil is in the details.

Before signing on the dotted line, make sure that your biweekly payments are applied to your balance immediately and not held until the end of the month. You also need to be cognizant of how interest accrues on your mortgage and any associated fees, because both components play a major role in how much additional value you will gain from making biweekly payments.

Another point to consider is whether or not biweekly payments are even the best option for you. Your alternative option is to make additional payments toward principal, which can help to produce the same benefits as biweekly payments but without the lengthy commitment. Though whether or not biweekly payments are appropriate for you, your mindset is a prudent one. To be focused on strategies for building equity and reducing expenses as quickly as possible is likely to pay dividends for years to come.

The post 4 Reasons You Should Make Biweekly Mortgage Payments appeared first on MagnifyMoney.

10 States That Struggled Most With Foreclosures in 2016

Overall foreclosure activity and the number of new foreclosures fell in 2016, but several states bucked the national trend.

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The post 10 States That Struggled Most With Foreclosures in 2016 appeared first on Credit.com.