Maximum Mortgage Affordability Calculator

What is a Maximum Mortgage Affordability Calculator?

A Maximum Mortgage Affordability Calculator is a financial tool that helps potential homebuyers estimate the maximum amount they can borrow for a mortgage based on their income, debts, and other financial factors. This calculator takes into account industry-standard debt-to-income ratios to provide a realistic estimate of your home buying power.

Formula for Maximum Mortgage Affordability

The formula for calculating the maximum mortgage affordability involves two main steps:

1. Calculating the maximum monthly mortgage payment:

\[P_{max} = \min(0.28 \times I_{monthly}, 0.36 \times I_{monthly} - D_{monthly})\]

Where:

• P_max = Maximum Monthly Mortgage Payment
• I_monthly = Monthly Income
• D_monthly = Monthly Debts

2. Calculating the maximum mortgage amount:

\[M_{max} = \frac{P_{max}}{r} \times [1 - (1 + r)^{-n}]\]

Where:

• M_max = Maximum Mortgage Amount
• P_max = Maximum Monthly Mortgage Payment
• r = Monthly Interest Rate
• n = Total Number of Payments

Calculation Steps

1. Calculate monthly income by dividing annual income by 12.
2. Determine the maximum monthly payment using the 28/36 rule:
   • 28% of monthly income
   • 36% of monthly income minus existing monthly debts
3. Choose the lower of the two values as the maximum monthly mortgage payment.
4. Convert annual interest rate to monthly rate.
5. Use the mortgage formula to calculate the maximum mortgage amount.
6. Add the down payment to get the maximum home price.

Example

Let's consider a scenario with the following details:

• Annual Income: $80,000
• Monthly Debts: $500
• Down Payment: $50,000
• Interest Rate: 3.5%
• Loan Term: 30 years

Calculation:

1. Monthly income: $80,000 / 12 = $6,666.67
2. Maximum monthly payment:
   • 28% rule: $6,666.67 × 0.28 = $1,866.67
   • 36% rule: ($6,666.67 × 0.36) - $500 = $1,900
   • Lower value: $1,866.67
3. Monthly interest rate: 3.5% / 12 = 0.2917%
4. Maximum mortgage: $395,305.85
5. Maximum home price: $395,305.85 + $50,000 = $445,305.85