MORTGAGE MATTERS

Mortgage formula cheat sheet

Take note: The latest figures available show the median home costs about $220,000, so we’ll use that figure as a base for our calculations. Other figures we’ll use: an average family’s annual salary is about $54,000 and it carries $7,630 in debt.

How much will a mortgage cost per month?

How much will a mortgage cost per month?

A mortgage can be paid off in numerous ways, but one of the most typical is to stretch those payments out over 30 years—that way, you break it down into bite-size pieces. Building off the numbers above, here’s how much your average mortgage would cost per month:

$176,000 at 4% interest rate = $840.25 monthly payment

Keep in mind, this monthly bill does not include property taxes, home insurance, HOA dues, or other home-related maintenance fees, which vary by area but are in the ballpark of a few hundred per year for a home at this price.

Also note that the longer you stretch out your mortgage payments, the more you’ll end up paying in interest. Over 30 years, the total you’ll fork over in interest amounts to $302,490.33!

But there are ways to lower the amount you pay in interest—like paying off your loan faster. Finish in 15 years, and you’ll end up paying only $234,333.13 in interest. Granted, for a 15-year loan you’ll have to cough up more per month—$1,301.85 instead of $840.25. But the upside is you’ll save a sizable chunk in interest over the life of your loan, and be mortgage-free in half the time. So if you can afford it, it’s an option worth considering.

How much mortgage can I afford?

Of course, you’ll want to buy a home that you can comfortably pay for. So, how do you know how much is too much, too little, or just right? The way they do this is by determining your debt-to-income ratio.

For most conventional loans, experts say you’ll want your DTI ratio lower than 36%. That means your debts don’t exceed more than about one-third of your income. But how does a mortgage fit into that?

To figure that out, start with your gross income (what you take home before taxes). Let’s say your family pulls in the U.S. average, which is $54,000 per year. Divide that over 12 months to get your monthly income.

$54,000 / 12 months = $4,500 income per month

Then total up your debts—including what you owe on credit cards, auto insurance, and college loans. Remember, debt includes only items that appear on a credit report, not recurring expenses like groceries or phone bills. Since the average American carries an average debt of $7,630 per year, we’ll use that number. Divide that by 12 to get your monthly debt:

$7,630 (average debt) / 12 months = $636 debt per month

Now, add that monthly debt to your average monthly mortgage payment of $840.25 to get your total debt owed per month:

$636 debt + $840.25 mortgage = $1,476.25 debt per month

Next, divide your monthly debts by your monthly income

$1,476.25 monthly debt / $4,500 monthly income = 33% DTI

In this scenario, the debt-to-income ratio is 33%—just below the 36% cutoff. Which means this mortgage would most likely pass the bank’s muster with flying colors! Calculate your own DTI here.