Mortgage calculations involve several types of percentages that you can use to determine whether you would qualify for a mortgage and how much you would have to pay for it. The loan-to-value (LTV) ratio shows the percentage of the property value you borrow. The debt-to-income ratio determines the percentage of your income you use to make your mortgage payments. The annual percentage rate (APR) refers to the cost of borrowing per year after taking into account any fees.
Calculate the amount of cash you have to make the down payment for the mortgage. The money can be in the forms of funds from your bank accounts, gifts from family and other sources.
Determine the price of the property you want. You may be able to negotiate the asking price listed in the advertisement to get a lower price, but using the listing price would give you a more conservative figure.
Deduct your down payment from the property price to obtain the amount you need to borrow. This is the amount of mortgage loan you need to secure.
Divide the loan amount by the property price to get the LTV ratio. For example, if the loan amount is $80,000 and the property price is $100,000, your ratio would be 80 percent.
Determine the amount of income you earn every year. Use the gross, pre-tax figure for this calculation.
Multiply your annual income by 28 percent. Generally, you should only use 28 percent of your income to cover your mortgage payments, according to Bankrate.com. For example, if your annual income is $50,000, you would get $14,000 to make mortgage payments each year.
Divide the result from the previous calculation by 12 to get your maximum monthly mortgage expense. Using the figures from the previous example, you can only spend $1,166.67 for mortgage payments each month.
Annual Percentage Rate
Obtain a financial calculator. Determining your annual percentage rate involves making complex calculations that are difficult to perform manually.
Enter your loan amount as the PV, which is present value. This figure represents the value of your loan at the beginning of your mortgage term before you accumulate any interest.
Calculate the number of months you will take to finish paying off the loan. For example, if you intend to take out a 30-year loan, you would pay it off over 360 months. Enter this number as N in your financial calculator.
Input your quoted annual interest rate from the lender as I/Yr in your financial calculator.
Enter 0 as FV, which is future value. This is the value of the mortgage at the end of the loan term. Because you will pay off the entire loan by then, the loan value will be 0.
Solve for PMT. You will get the amount of money you need to pay your mortgage lender every month.
Clear your previous calculations and enter the figure from the previous step as PMT.
Deduct the amount of loan fees from the loan amount to get the actual amount of money you borrow. For example, if you need to borrow $100,000 and pay $2,000 in upfront fees, you would in effect borrow $98,000.
Solve for I/Yr on your financial calculator. This figure is the APR, which is the actual interest rate of the loan after you take into account the upfront fees. Higher fees would lead to higher APR, while lower fees would result in lower APR.
- "Bankrate.com": How Much House Can You Buy?; April 2005
- "The Mortgage Professor"; Tutorial on Annual Percentage Rate (APR); Jack Guttentag; August 2010
- Federal Housing Finance Agency. "FHFA Announces Maximum Conforming Loan Limits for 2020." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau. "What Is a Jumbo Loan?" Accessed Mar. 10, 2020.
- U.S. Department of Housing and Urban Development. "Let FHA Loans Help You." Accessed Mar. 10, 2020.
- Office of Public and Intergovernmental Affairs. "Federal Benefits for Veterans, Dependents and Survivors." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau. "Seven Factors That Determine Your Mortgage Interest Rate." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau. "What Is a Loan-to-Value Ratio and How Does It Relate to My Costs?" Accessed Mar. 10, 2020.
- National Credit Union Administration. "Homeowners Protection Act (PMI Cancellation Act)." Accessed Mar. 10, 2020.
- Federal Reserve Bank of St. Louis Review. "A Primer on the Mortgage Market and Mortgage Finance," Page 37. Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau. "With an Adjustable-Rate Mortgage (ARM), What Are Rate Caps and How Do They Work?" Accessed Mar. 10, 2020.
Edriaan Koening began writing professionally in 2005, while studying toward her Bachelor of Arts in media and communications at the University of Melbourne. She has since written for several magazines and websites. Koening also holds a Master of Commerce in funds management and accounting from the University of New South Wales.