Definitions and examples for Annual Percentage Rate (APR), title insurance, closing costs, income, ratios, Private Mortgage Insurance (PMI) etc. will empower you like the pros.
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This is your "annual gross income" before taxes. If you are married, it should be your total combined income. A general rule of thumb states: If you have the capacity to repay the loan, you can afford a home 2.5 times the amount of your "annual gross income."
Set all inputs first, then change this one for various budgets.
This represents how much of your monthly income you are willing to
spend on a home. Standard underwriting guidelines typically used by lenders allow you to spend 28% of your "monthly gross
income" (before taxes) for housing. This does not mean you have to spend this much.
Think of % of Income as the "master" INPUT. Set all other INPUTS (some default settings will be good enough), then come back and change this one INPUT up or down to change everything. As you raise/lower this "key" variable, check the ratio values and the dynamic text by Strategy: (In the Housing/Income ratio & Housing+Debt/Income ratio section) so you don't exceed the set limits.
If the limits are exceeded, you will also see the amount to lower % of Income by directly below where you input it.
How much do you want to put down on the loan?
Important tip
Most lenders do not require private mortgage
insurance (PMI) when you make a down payment of 20% or more.
In lender's terms, this means a loan/value (LTV) ratio of 80% or less.
For example, if your down payment is 10%, the LTV ratio is 90% (you
are borrowing 90% of the Purchase Price).
You pay PMI when the LTV ratio is in excess of 80%. Confused?
The Bottom Line
The PMI percent is
calculated for you automatically. "Dynamic" text displayed
to the right of the PMI input box displays
the percent you should enter in manually. Yes, it is that easy. Oh, please pay
attention if the down payment is 20.0% or higher - PMI goes to zero (.00). More on PMI in
the PMI section.
This input is the current "market rate," "stated rate, " or "nominal rate of interest - not the APR %." This "market rate" does not reflect the true cost of borrowing like the APR % is supposed to. Please use our APR % tool for this calculation and read the comments below.
Remarks
The stated rate, or nominal rate, differs from the APR %. The stated rate does not include any costs associated with the loan, the APR %
does. It is important to distinguish between the two. A few facts about APR% should help.
APR %
Lenders quote APR %, or annual percentage rate, (within 3 days) to provide a more truthful insight of the interest rate you are paying.
The APR %, as calculated under the Truth-and-Lending Act, combines the interest rate (stated rate or nominal rate) with other costs of
the loan into a single figure. This number is supposed to reflect the true cost of borrowing and provide a standardized yardstick by
which to compare financing from different sources. Keep in mind that APR % may be calculated slightly different at each lender.
The length of the loan in years. Please note the Mortgage Genie™ also applies to variable rate mortgages as well because variable rate loans are "fixed" to start with.
Title insurance protects both the lender and the buyer from flaws in the title detected after the property is purchased. In most cases the amount insured is equal to the Purchase Price. It is negotiable between the buyer and the seller who pays for title insurance.
A good "estimate" for title insurance $2.50 per $1,000 of the Purchase Price. A more accurate number may be obtained from a source where you are planning to buy.
Important Tip
A combined lender/owner policy may save you money. Additional savings may be possible if a "reissue rate" is
available from the company who previously insured the title.
Property taxes are paid annually to the local government where the property is located. A good "estimate" is 1.5% of the Purchase Price, but a more accurate number may be obtained from asource where you are planning to buy.
Important tip
It is very common for an "adjustment" to be
made regarding property taxes at closing. For example, the
seller may owe taxes for the "current period" and is obligated to
pay, or the seller may have already paid and the buyer is obligated to reimburse this expense.
Home owners insurance (HOI), or Hazard Insurance, protects both you and the lender from certain events. The extent of thecoverage is determined by the scope of the policy. A typical home owners insurance package includes personal liability, property, and dwelling coverage. An example of a less common component would be flood insurance.
A good "estimate" is .5% of the Purchase Price, but a more accurate number may be obtained from a source where you are planning to buy.
Important tip
Lenders typically require the first years premium down (paid at closing). To be conservative, our software lists home owners insurance
down and monthly.
PMI protects lenders from loss if the borrower defaults.
The first PMI "input" number is a % of the loan that is paid up-front and is part of the "closing costs," of the mortgage. The second number is a % of the loan that is paid yearly. To help lower "closing costs," the current trend is a higher premium charged yearly.
The cost of PMI is correlated to how much the Down Payment is. The following table illustrates "good estimates" of PMI premiums for common down payments.
| Down Payment | % of loan yearly |
| 0 - 7.49% | 0.78% |
| 7.5 - 12.49% | 0.52% |
| 12.5 - 19.99% | 0.32% |
| 20% and greater | 0.0% |
Important tips
The PMI percent is calculated for you automatically.
"Dynamic" text displayed to the right of the PMI input box displays the percent you should enter into the input box manually.
Yes, it is that easy. Oh, please pay attention if the down payment is 20.0% or higher - PMI goes to zero (.00).
The bottom line
If your down payment is 20% or more (have a loan/value ratio (LTV) of 80% or less), PMI
is not required. However, ask your lender to be sure.
The PMI controversy
If you put less than 20% down, say 10%, once you reach 20% equity you are no
longer obligated to pay PMI It is your responsibility to inform the insurance company when you reach the 20% mortgage equity though.
However, you can reach 20% equity in two ways. By making enough payments (an additional payment can help build equity faster) and the house appreciating in value. If you feel your home has appreciated enough in value to meet the 20% equity "cut-off" point, contact your lender and reorder an appraisal. If the new appraised value, combined with the amount you have paid equals or exceeds 20%, they should assist you with the termination of the PMI premium. You may further save money if you contact the same real estate appraiser that appraised the property when you purchased. If it is recent enough, a discount could be applied because the appraisal could take less time. Hey, it never hurts to ask.
Fees, or dues, for an Association, Condominium, or Co-op may be accounted for here. The fee is calculated as a % of the Purchase Price. If your fees are quoted to you in dollars, change the % until you see the correct dollar amount displayed.
Points, or "mortgage discount points," are a confusing concept. One point equals 1% of the loan amount and usually refers to a cost associated with the loan. For example, if there were a $100,000 loan, one point would be equal to $1,000.
Points can be viewed in a different way as well. They can be looked at as a way to "buy down" the interest rate of the loan, which amounts to paying interest up-front. A general rule of thumb is one Point equals 1/8 of 1% in yield. For example, to lower the interest rate of a $100,000 loan from 9% to 8%, it would cost "eight points " or $8,000. Confused?
The bottom line
Discount points are a cost to you incorporated into the mortgage and
increasing the APR. You do not want to pay
points unless market conditions leave no alternative. Shop around
and find the best deal possible.
Origination fees charged by the lender to "originate" or write up the loan, and are very similar to points.
Like points, mortgage origination fees are figured as a % of the loan, but oddly enough, are figured in points. Recall a point is 1% of the loan, so a $100,000 loan, that has origination fees equaling 1 point, would cost you $1,000. Now you can see why these terms are used interchangeably.
The bottom line
Origination fees are a cost to you.
You do not want to pay origination fees or points unless market conditions
leave no alternative. Shop around and find the best deal possible.
Other closing costs are fees charged by lenders at closing. These costs will vary from one lender to another. Some closing costs are itemized under Total Savings Needed automatically, however; you may account for additional costs you pay for in this field.
Important tip
It is typical for the buyer to pay these costs, however; who pays for what is
negotiable. It may be possible to finance all or some of the closing costs
as well. Fannie Mae estimates total closing costs typically range from
3-6% of the Purchase Price.
Also, do not include escrow amounts for PMI, HOI, and property taxes here. These costs are already accounted for. Your lender will assist you with escrow information.
Escrow Account
This is a "reserve" account used to pay taxes and insurance and is
managed by a third party. Ask your lender for details regarding mortgage escrow information.
The following list illustrates some common other closing costs you may incur:
*Items in red are "generally accepted" inputs for the APR calculator.
Utilities should be calculated at approximately .1% of the Purchase Price. For example, if the Purchase Price is $100,000, a good estimate for utilities would be $100 per month.
Important tip
Estimating utilities provides a more realistic mortgage budget than no estimate at all. Different regions of the country
may deviate from this estimate somewhat.
Maintenance should be calculated by at approximately .05% of the Purchase Price. For example, if the Purchase Price is $100,000, a good estimate for maintenance would be $50 per month.
Important tip
Estimating maintenance provides a more realistic budget than no estimate at all. Different regions of the country
may deviate from this estimate somewhat. Simply use the estimate as an approximation.
If you want to "prepay," or add to your monthly payment to save on interest charges and pay the loan off early, you can figure that into your projected budget. Make sure there is not a prepayment penalty in the loan agreement, and the bank knows to reduce your principal with the additional money.
Adding to the principal by "prepaying" accelerates equity building. If you are paying PMI, this could help you reach the 20% equity "cut-off" point faster and terminate the PMI premium.
Important tip
To insure the additional payment is applied to principal, it is a good call to write
two checks. On the memo portion of the second check write, "apply to principal
only." This helps the person receiving the payment to differentiate between the two and acts as a receipt for your records. To see how an additional
payment affects the loan, see the 30y & 15y Fun Facts to Know section at the bottom of the pre-qualifying home loan software.
These are other long-term debts, or payments, you make every month. Examples include other house payments (principal & interest only), installment loan payments, a car, boat, snowmobile, or motorcycle payment, child support, alimony, credit card payments, and investments with negative cash flows.
Important tips
Typically, short-term debt (12 months or less) should not be used for this calculation. For example, if you have 9 monthly
payments left on your automobile loan, and your obligation will be fulfilled at that time, exclude this payment from the calculation.
Typically, lenders will use your minimum credit card payments and add them together.
The amount of the negative cash flow is "added" in when calculating other monthly debt. For example, if a rental property has a monthly principal and interest (PI) payment of $800 and is rented for $600, you would "add" in $200 to other monthly debt.
This is the monthly payment including Principal + Interest.
The PITI is the monthly payment including Principal + Interest + Taxes + Insurance.
To be conservative, MoneyCops.com adds Assoc./Condo Fees to the calculation of PITI. Assoc./Condo Fees are a bona fide monthly housing expense and should be included. At least this is our opinion.
The Total Budget is the best estimate of what the real cost of ownership is. Simply comparing the principal + interest PI to the Total Budget illustrates how much of a difference there can be.
Important Tip: Spending more of your income on housing than you really can/could afford can have a negative impact on lifestyle. For example, you may not be able to travel as much etc. Simply use this too to find the budget that fits your lifestyle, and present the printed report to all parties involved. This will make it clear to everyone exactly what you are willing to spend.
Also known as the Housing Expense ratio, standard mortgage underwriting guidelines typically used by lenders call for your Housing/Income ratio not to exceed 28.0%. This ratio is calculated as follows: (PITI / Monthly Gross Income)
Remarks
Important Tips: A lender may change the standard limits of either the Housing/Income
ratio (28.0%) and/or Housing+Debt/Income
ratio (36.0%) based on your
creditworthiness. For example, if you have Excellent credit and have
held your current job for more than 3 years, the lender may raise the
limits. Ratio limits may vary in different regions of the country as well.
Example
If you want to raise the Housing/Income ratio to 30.0%, enter: 30.0
Also known as the Total Debt/Income ratio, standard underwriting guidelines typically used by lenders call for your Housing+Debt/Income ratio not to exceed 28.0%. This ratio is calculated as follows: ((PITI + Other Monthly Debt) / Monthly Gross Income).
Remarks
Important Tips: A lender may change the standard limits of either the Housing/Income
ratio (28.0%) and/or Housing+Debt/Income
ratio (36.0%) based on your creditworthiness. For example, if you have excellent credit and have
held your current job for more than 3 years, the lender may raise the limits. Ratio limits may vary in different regions of the country as well.
Example
If you want to raise the Housing+Debt/Income ratio to 40.0%, enter: 40.0
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