Mortgage Affordability Calculator

What is Mortgage Affordability?

Mortgage affordability refers to the amount of mortgage a person or household can reasonably afford based on their income, expenses, and other financial factors. It helps potential homebuyers understand how much they can borrow and what price range of homes they should consider.

The Mortgage Affordability Formula

The basic formula for calculating the maximum affordable mortgage is:

\[M = P \times \frac{r(1+r)^n}{(1+r)^n - 1}\]

Where:

• \(M\) = Maximum affordable mortgage
• \(P\) = Monthly mortgage payment capacity (typically 28% of gross monthly income)
• \(r\) = Monthly interest rate (annual rate divided by 12)
• \(n\) = Total number of payments (years of loan term multiplied by 12)

Step-by-Step Mortgage Affordability Calculation

1. Calculate total monthly income: \[\text{Total Monthly Income} = \text{Monthly Income} + \text{Other Income}\]
2. Determine monthly mortgage payment capacity: \[P = \text{Total Monthly Income} \times 0.28\]
3. Calculate monthly interest rate: \[r = \frac{\text{Annual Interest Rate}}{12}\]
4. Calculate total number of payments: \[n = \text{Loan Term (years)} \times 12\]
5. Apply the mortgage affordability formula: \[M = P \times \frac{r(1+r)^n}{(1+r)^n - 1}\]

Example Calculation

Let's calculate the maximum affordable mortgage for someone with a monthly income of $5,000, other income of $1,000, an interest rate of 4% per year, and a loan term of 30 years:

1. Total Monthly Income = $5,000 + $1,000 = $6,000
2. Monthly mortgage payment capacity: $6,000 × 0.28 = $1,680
3. Monthly interest rate: 4% ÷ 12 = 0.3333%
4. Total number of payments: 30 years × 12 = 360
5. Maximum affordable mortgage: \[M = 1680 \times \frac{0.003333(1+0.003333)^{360}}{(1+0.003333)^{360} - 1} \approx $352,489\]

Visual Representation

The green portion of the bar represents the calculated maximum affordable mortgage ($352,489) relative to $1,000,000.