4 approaches to mortgage budgeting

July 31st, 2012

As loan rates continue to fall, unprecedented opportunities exist for home buyers today, and a mortgage calculator can help them take full advantage of the situation. Mortgage calculators are versatile tools, but people often fail to make the most of them. Here are four ways a loan calculator can help you formulate your home-buying budget:

  1. Payment-based budgeting. In this approach, you start by figuring out the house payment you can afford. Then, entering that payment at current mortgage rates, use a mortgage calculator to determine what total home price those figures will buy. This then can form the parameters for your property search.

  2. Price-based budgeting. If you are not on such a tight budget, you might flip the process around and start with the going price for the type of property you desire. You would then enter this and the current mortgage rate into a mortgage calculator to determine what kind of monthly payment would result. This should then form the centerpiece of your household budget.

  3. Interest minimization. Another approach is to minimize the interest cost of the mortgage. You would do this by entering a 15-year mortgage assumption into a mortgage calculator to determine the home price you can afford, or what mortgage payment would result from a given target price. If you can fit the payment for a 15-year mortgage into your budget, it will lower your rate and cut the time over which you pay interest in half.

  4. Rate targeting. If you have a price in mind that is a little outside your budget currently, you can use a mortgage calculator to determine the mortgage rate that would make that price affordable. This will help you watch the mortgage market and act decisively if your target rate is met.

Sometimes people make poor decisions when they find a property first and only then consult a mortgage calculator to see if they can afford it. An emotional attachment to a specific property can lead people to stretch their budgets. No matter which method suits you, using a mortgage calculator can help you determine a budget in advance and stay on track to reach your financial goals.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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