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When you’re shopping for a house and considering a mortgage loan, establishing what you can afford for house payments can be a lengthy process. You have to run calculations, get updated payment scenarios from your mortgage company, and determine whether or not you can qualify.
With all these moving parts, we hope it comes as a relief to hear there’s a simpler way to calculate a home payment. This simple solution will be a huge help in a competitive market that doesn’t allow for extended number crunching.
Before we get into the nitty-gritty, it will be helpful to know these two key terms when using our easy house payment formula.
PITI is an initialism used to reference the four factors that influence your monthly house payment:
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Important for determining how easily you’ll be able to pay off your debts, the DTI is the percentage of your total monthly debt against your monthly income. In math terms, it looks like this:
(PITI + monthly liabilities) ÷ monthly income = DTI
Most lenders prefer your DTI stays at or under 45%, so it’s important to consider your other monthly liabilities alongside your PITI when getting a mortgage.
Now that you’re familiar with PITI and DTI, you’re ready for this simple truth: for each $100,000 you borrow, expect a monthly mortgage payment, or PITI, of $725.
It’s true! In most cases, your principal, interest, property taxes, and home insurance for $100,000 will come out to about $725 each month. Here’s a handy table for reference:
Amount Borrowed | Approximate PITI |
$100,000 | $725 |
$200,000 | $1,450 |
$300,000 | $2,175 |
$400,000 | $2,900 |
$500,000 | $3,625 |
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You can easily add half of $725 (that’s $362.50) if you’re trying to calculate for an extra $50,000. Or you can divide the loan amount by $100,000 and multiply the result by $725 to get the estimated PITI for your loan.
Let’s look at an example. Say you want to buy a $350,000 home. You want to know whether the payment is affordable and whether you’ll meet your lender’s debt ratio thresholds.
Pretend you already have a 20% down payment ready, which is $70,000 for a $350,000 home. So in total, you’ll be borrowing $280,000. Divide that by $100,000 and you get 2.8. Using this information, the basic house payment formula will look like this:
$725 x 2.8 = $2,030
To spell it out, we know that when you borrow $100,000, your PITI will be about $725 per month. When we divide $280,000 by $100,000, we get 2.8. Similarly to how multiplying $100,000 by 2.8 will result in the full loan amount, multiplying $725 by 2.8 will give us the total PITI amount. So the total PITI would be $2,030 per month.
Once you’ve calculated the PITI, make sure you’ve got a debt-to-income ratio a lender will approve of. Remember, the highest DTI most lenders will allow is 45%. Continuing with our example and using an income of $4,750, here’s how to find the DTI for a $2,030 PITI if you have no other monthly liabilities:
$2,030 ÷ $4,750 = 42.74%
As you can see, you simply divide the PITI by your income. In this case, the result is 42.74%, which is low enough to possibly qualify for a loan.
Remember to include any other monthly liabilities you have when you calculate your DTI. Let’s see if you can still reasonably afford the house with hypothetical monthly liabilities.
Pretend you have a car lease payment of $300 a month and credit card payments of $80 a month. This changes our previous DTI formula like so:
($2,030 + $300 + $80) ÷ $4,750 = 50.74%
With those debts, you would have a 50.74% DTI, which means you likely wouldn’t qualify for that large of a loan. That’s a rather different situation, so don’t forget to include your monthly liabilities when calculating DTI.
Your monthly income and expenses may be very different from our hypothetical scenario. Try plugging in your PITI with the formula below to get your personal DTI, and make sure it’s below 45%:
(PITI + monthly liabilities) ÷ monthly income = DTI
Remember, even if your DTI is below 45%, you need to consider your lifestyle and other living costs when deciding on a home. Are you willing to be house poor for a large mortgage, or will you be just as happy with less home and more spending money each month? The choice is up to you!
Our formulas for PITI and DTI are best for a solid estimation, but they’re not exact for every unique situation. Here are some other factors that will affect your monthly house payments:
If you’re thinking of buying a home or are currently preparing to purchase one, check out some of our other mortgage tips and tricks.
Image: Hemera
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