Course 1 – Unit 6: Effect of Lower Debt Payments

Mortgage Calculator Feature 3: See Effect Of Lower Debt Payments

Use a mortgage calculator to calculate how much you can afford to spend on a house based on your annual income and your other debts. The DTI feature is the debt-to-income ratio, which is the percentage of your income that goes to monthly debt. Lenders often look for a ceiling to DTI, like 43%, to know the borrower won’t get in trouble. Many consumers aim for a DTI of 36% to be conservative. Note the dramatic effect on home affordability when monthly debt payments go down. A home buyer who owes $500 per month in student loans, auto loans, and other debts, could afford a home of about $215,000 with an income of sixty thousand dollars annually and ten percent down.

The same borrower could afford a home above $285,000, if they had only $100 in monthly debt payments.

This is a buying-power increase of seventy thousand dollars with only a $400-per-month reduction in other payments. It could be a good idea to make a plan to eliminate or reduce high monthly payments prior to applying for a home.