Home Loan Calculations

Home Loan Calculations

Home Loans are basically all the same. That may seem like a very bold statement.

In actuality there is only one type of home loan: one that you must pay back. From that point on, everything else is just a creative way of packaging a loan to produce a particular result. Certain ways of packaging may make the initial loan payments look very attractive, but the long-term consequences of the loan could actually be very disastrous. Unfortunately, when something is given to you with one hand, it is usually taken away with the other.

Important Considerations For The Mortgage Home Loan Procedure

When you first decide to purchase a home, an income or mortgage ratio analysis can give you an estimate of the price you can afford. Basically, this formula says that 25% of your gross income per paycheck can be used toward a house payment. Using this formula, you can begin to look for a home and stay within a price range suitable to you. There are many variances, but the formula is a good basic guideline to keep you within your budget.

A second formula that is also useful is to calculate 2 to 3 times the amount of your gross annual income to determine the amount of the home loan. The biggest issue with these formulas is that they do not consider interest rates or the type of loan you might obtain. Nor do they consider debt, living expenses or the size of a family.

Lenders use ratios as guidelines against monthly income and debt to determine the home loan payment a person is qualified to make and still have money left over at the end of a month for other living expenses.

However, there is an issue with trying to use rule of thumb formulas and ratios without having a good understanding of how they may or may not be used. For example, if someone hears they can use up to 30% of their income for a loan payment for a home, do they know what that 30% includes? Is it the principle and interest? Does it include anything else? Is this 30% on gross or net income? If gross or net, is anything deducted from the income before the 30% calculation?

There are several issues a person needs to understand for the rule of thumb and ratios to have a meaningful value when considering a home loan. All rule of thumb formulas and ratios should only be a baseline or guideline until a person has an understanding of how to use them effectively.

In most cases it is not until you are close to a decision on your home selection that you begin to search out financial options. However, the best time to consider financial options is before your selection, because the right type of home loan can mean so much when choosing the best house for your needs. Bank officers and mortgage lenders are in the business of making loans. It is to their advantage to be as friendly and helpful as possible, hoping that you will return to them to write your home loan.

Most real estate agencies have mortgage people with whom they have dealt for years. You will be encouraged to use these people. Should they meet your needs then all is well. If not, let both the real estate agency and the mortgage representative know that you want to write your home loan elsewhere. After all, you are the one who will be responsible for the mortgage for many years, not them.