Mortgage Loans How Much Can You Afford?

By Karen Lawson
Calculators for Mortgages Columnist

Email this Article | Format for printing

Buying a home is a major financial transaction and the process can seem complicated. Understanding how mortgage lenders determine how much you can afford to borrow can help you prequalify for a home loan. Ideally, prequalifying before you look for a home can help you get sellers' attention. Sellers often prefer prequalified buyers because they're less likely to encounter problems and delays during the loan approval process. Before You Prequalify
You can use free online mortgage calculator tools to estimate how much your payments will be, how much you can afford to borrow, and to compare features and benefits for various mortgage options and terms.  Let's say your target payment amount for principle and interest (P&I) is $1500.00 a month. Enter this amount in the affordability calculator along with the estimated interest rate and the length of the loan in years. If you want a mortgage with a payment of $1500.00 at 6% for 15 years, the estimated amount of your mortgage would be $177,755.27.  If you increased the term to 30 years, the estimated amount you could borrow increases to $250,187.42.

Mortgage Calculator Tools Provide Valuable Information
Before making any major purchase, doing some research can help you save money and find out exactly what you want. Mortgage calculator tools allow you to try a variety of mortgage scenarios without sales pressure. You can input scenarios until you find mortgage terms that truly meet your needs.  

Another way to use a mortgage calculator is to identify ways to save on a mortgage loan or refinancing. If you have a specific date in mind for paying off your mortgage, you can compare savings on shorter loan terms. For example, if you want to borrow $250,000 at 6% over 30 years, your P&I payments would be about $$1498.88, and you'd pay about $289,595.47 in interest over 30 years! However, if you reduce the loan term to 15 years, your payments would be about 2109.64, and you'd pay approximately $129735.57 in interest over the loan term.  By paying an additional $610.76 per month, you could save approximately $159,859.90 over the 15 year loan term!

It's important to understand that mortgage calculator tools do not evaluate the variables considered by mortgage lenders in evaluating (underwriting) a mortgage loan for approval. Your credit history, how much cash you have on hand for a down payment and closing costs, and other factors can alter the actual amount a mortgage lender is willing to approve for a new home loan or refinancing.



About the Author
Karen Lawson is a freelance writer with extensive background in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.