Microsoft Excel 4C: PMT, Buying a Home You Can Afford, Gross Debt Ratio

Home affordability:

• When you go to the bank for a loan on a house, typically you pay back the money that you borrow over 25 or even 30 years.
• At one time you had to have a 10% down payment in order to purchase a home and the bank would lend you the rest.
  • Now you can often put 5% down (and sometimes even $0).
  • However, the lower down payment that you make the more mortgage insurance you must buy.
  • This can add up to many thousands of dollars over the course of a mortgage, so it is wise to put as much of a down payment as you can in order to save this mortgage insurance.

• Mortgage insurance (the kind paid to the bank) guarantees that if you go bankrupt an insurance company will pay back the bank if the bank is forced to sell your house and still loses money.
• If you put a 25% down payment, mortgage insurance may not be required.

• Banks will only lend you a certain amount of money, referred to as your Gross Debt Ratio.
• Generally you
• can't borrow any more money than 32% of your income.
  • Example: If you earn $100,000 then your debt payments shouldn't be more than $32,000 per year ($32,000/12months=$2,667.00 per month).
  • This debt ratio includes all debt (cars, credit cards etc.)
  • This debt ratio also includes amounts paid for heating, utilities and property taxes on a house.

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