Calculator For House Purchase Affordability

Affordability Formula:

\[ \text{Affordable Price} = (\text{Monthly Income} \times 0.28) \times \frac{(1 + r)^n - 1}{r \times (1 + r)^n} \times 12 - \text{Down Payment} \]

Monthly Income:

currency

Monthly Interest Rate:

decimal

Loan Term:

months

Down Payment:

currency

Affordable House Price:

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1. What is House Purchase Affordability?

The affordable house price represents the maximum price you can pay for a home while keeping your housing expenses within recommended limits (typically 28% of your monthly income). This calculation considers your income, loan terms, interest rate, and down payment.

2. How Does the Calculator Work?

The calculator uses the affordability formula:

\[ \text{Affordable Price} = (\text{Monthly Income} \times 0.28) \times \frac{(1 + r)^n - 1}{r \times (1 + r)^n} \times 12 - \text{Down Payment} \]

Where:

\( \text{Monthly Income} \) — Your gross monthly income
\( r \) — Monthly interest rate (annual rate ÷ 12)
\( n \) — Loan term in months
\( 0.28 \) — Recommended housing expense ratio (28% of income)
\( \text{Down Payment} \) — Amount available for down payment

Explanation: The formula calculates the present value of all monthly payments you can afford, then subtracts your down payment to determine the maximum home price.

3. Importance of Affordability Calculation

Details: Calculating affordability helps prevent overextension, ensures comfortable mortgage payments, and helps set realistic home-buying budgets.

4. Using the Calculator

Tips: Enter your gross monthly income before taxes, the expected monthly interest rate (divide annual rate by 12), loan term in months, and available down payment. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why use 28% of income for housing?
A: The 28% rule is a common guideline to ensure housing costs don't overburden your budget, leaving room for other expenses and savings.

Q2: Should I include taxes and insurance?
A: This calculator focuses on principal and interest. For complete budgeting, consider adding 1-2% of home value annually for taxes/insurance.

Q3: How does down payment affect affordability?
A: Larger down payments increase your affordable price by reducing the loan amount needed and potentially eliminating PMI (private mortgage insurance).

Q4: What if interest rates change?
A: Higher rates decrease affordability. Consider stress-testing your budget with rates 1-2% higher than current levels.

Q5: Are there other costs to consider?
A: Yes, factor in closing costs (2-5% of home price), moving expenses, maintenance (1% annually), and potential HOA fees.