Doing Your Own Paycheck to Paycheck Analysis
Step-by-Step Instructions
Step 2: Calculate Homeownership Affordability
Step 2: Calculate Homeownership Affordability
Determining the affordability of home ownership involves a six-step process.
(1) Determine the mortgage amount
Based on the data you have gathered, assumea home purchase price amount and down payment amount. Subtract down payment from the home purchase price to determine the amount of mortgage needed.
Example: Assume a $250,000 purchase price and 10% down payment
$250,000 - $25,000 = $225,000 mortgage
(2) Calculate monthly principal and interest
Use the quoted interest rate and mortgage term (Paycheck assumes a 30-year fixed mortgage) to obtain monthly principal and interest payments from:
- Printed mortgage tables OR
- Pocket calculator or spreadsheet OR
- Online calculator:
Example: P&I for $225,000 mortgage = $1,407/month
Note: In this example the interest rate was 6.4 %
(3) Add monthly taxes and insurance to monthly principal and interest amount to come up with monthly homeownership costs (also known as PITI)
Example: Taxes + Insurance = $450/month
$1,407 + $450 = $1,857 Total Monthly Payment
(4) Annualize total housing costs
Multiply total monthly payment by 12 to get total annual housing cost
Example: $1,857 x 12 = $22,284
(5) Calculate income needed to qualify for the loan
Assume housing costs are no more than 28% of income. Divide total annual housing cost (Step 4) by .28
Example: $22,284/.28 = $79,586
You have to earn at least $79,586 to qualify for a $250,000 mortgage.
(6) Compare the salaries of your selected occupations to determine if the salaries are sufficient.
Use the local data on salaries that you gathered in step one.
Example: Assume a teacher makes $49,000/year and a firefighter makes $46,500/year (These are typical salaries nationwide)
At these wages, persons with either occupation cannot afford a $250,000 mortgage.
Step 3: Calculate Rental Affordability >>
