Updated: 5/2009

Hello and welcome to the Mortgage Planner Program...

To use the Mortgage Planner simply select the interest rates for the term desired enter the income being used to qualify for the mortgage, enter the cost of the home, and then enter any payments to banks, alimony, etc. (where you have 10 payments or more).  Do not include monthly bills like the phone and electric bill.  If there aren't enough fields to hold everything, then just double up on two or more of the items and enter them that way.  If you don't know the taxes, mortgage or home insurance, leave blank or else put the yearly amounts in the appropriate field and the planner will figure the monthly amounts.  If you plan on putting 20% down, you may not have to pay mortgage insurance so place $1 in that entry window.  Now you can press "calculate" and the window to the right will fill up with data.  Its a scrollable window so you can read that or read the file that the program creates.  

The key to an affordable mortgage is the mortgage debt to monthly income ratio.  You really don't want this figure to EVER go above 30% and banks usually want this figure to be at 28% or less.  If you make more money or if you borrow less money, this figure will go down. This debt ratio is adjustable so you can see how it affects the amount of mortgage you can afford.  The total debt to monthly income ratio is the percentage of all of your monthly bills to your monthly income.  This amount should NOT exceed 36%.  The reason for this is that some of your income is going for discretionary spending and for bills like utilities and savings.  For this example, these "expenses" will come out of the remaining 64% of your monthly income.  However, if you have a car payment, or any other loan, you should include that in the field(s) provided.  If your total debt ratio is greater than 36%, you should pay off some bills before obtaining a mortgage.  Ideally, you should be debt free.

After doing a calculation, a file called "results.txt" will be created, gathering all of the info and putting everything into a text format explanation of what you can afford.  If you want to save that information, just rename the "results.txt" file to something else.  That way your saved information doesn't get written over should you do another calculation.  If you fill out everything but leave the cost of the home field "blank" it will give the amount you can afford for a rent payment.  The "results.txt" file will be written with this information too.  Changes to taxes, income, or the additional outgoing monthly payments WILL affect what you can afford.  If you provide the tax bill and mortgage insurance only and provide income and monthly housing to income ratio, you will be provided with a monthly tax bill and the surplus amount, if any, that is available.  If the surplus is negative, then you would have to increase the monthly housing debt ratio to keep this amount in the positive dollar range. (Note: Doing this might cause you to go above your desired debt to income ratio(s) ).  The only way to fix this would be lowering taxes, home insurance, eliminating other payments, or by making more money to cover the negative surplus.

If you want to see how much extra you can spend before the expense would affect what your budgeted house payment would be, just start placing $50 increments in the "other payments" field and recalculate.  If no change in your monthly payment then put another $50 in and repeat until you see a change in the monthly payment.  The total amount placed in that field before it affected the payment is the amount of "buffer" you have before it would affect your house payment.  The same can be done for TAXES.  You can use the mortgage planner to see how many years of TAX INCREASES it would take before you would be required to either refinance your mortgage to stay at a safe debt ratio or by infusing more cash (additional income) to limit the debt ratio that way.  I hope this program can help you take the confusion out of mortgages and give a clear picture of what is really required to own a home without getting into a financial crunch.  


Feel free to copy this disk and give to anyone who may need help planning their rent/mortgage payment and budget.

Some ideas for getting a mortgage you can afford.

1. Only use ONE income for qualifying for a mortgage.  The lenders will tell you that you can qualify for a
large mortgage, but you must use both incomes (if there are two of you working) to qualify.  Don't do this!
Should one of you loose your job, you may also loose all your money invested e.g. including down payment and 
all of the payments you made, if the bank is successful in foreclosure.  The only way out of this would be 
to sell before the bank tries to take ownership.  This "forced" sale would likely be at a loss. 

2. Again, your total debts should not amount to more than 36% of your monthly take home income.  Remember, you have other financial obligations and hopefully some savings goals too.  The mortgage payment should not exceed 28% of your 
monthly take home income. (mortgage payment divided by the monthly income <= .28) If a lender tells you
you can afford more than this amount simply tell him/her that you are not interested in using two incomes or 
subjecting yourself to a payment that exceeds 28% of ONE of your incomes. It is VERY important that you do this!  
 
3. A 15 year mortgage is preferable to a 30 year mortgage because it will save you thousands of dollars in interest payments.  On a 15 year loan, in just 90 months the monthly amount of your mortgage payment being paid to the loan PRINCIPAL is twice that of the interest portion of your payment.  On a 140,000 30 year loan at 5.25% interest, the above example would NOT happen until you have made two hundred and sixty eight monthly payments! (Just over 22 years).  The monthly cost of a similar 15 year mortgage requires an additional $352 dollars per month but you will save yourself about $76,000 and you will own your home 15 years sooner which means you won't be making those payments either.

4. Try to become debt free before you commit yourself to a 15 or 30 year obligation.  Other debts just cause 
you not to qualify for the mortgage you could have had, and you can get the larger mortgage without placing any extra financial burden on yourself.  

5. Try to put down as much money as possible toward the home you wish to buy.  The more collateralized your 
loan is, the more likely you are to get the loan.  That is the amount that the bank would receive, should you default.
Collateralizing your loan removes some of the risk the bank must accept when they make the loan.  Most banks would like 
to see at minimum 10% of the loan value as a down payment.  Put 20% down and you may not have to pay the lending
institutions mortgage insurance, which protects them, not you!  The more you have to pay back, the more its going to cost..period!  

A word about mortgage insurance.  If you default on the loan, the bank is paid for their loss by the mortgage insurance company.  Now, that insurance company can also come after the money they had to pay the bank from YOU!  Yes, they can sue you to get their money back ... another reason to put down 20% or more.

6. Don't forget that you will also have some closing costs.  Realtors usually charge a commission of about 6% of the home value (usually paid by the seller).  The seller and buyer will have LENDER closing costs of approximately 1% to 2% of the home value.  My wife and I recently purchased a home and the lending institution charged approximately $1700 at the closing.  Don't just use any home inspector when having the home you wish to buy inspected.  Some do a good job and some don't.  Narrow down your choice of homes you are interested in to one or two, and have them inspected.  A home inspection can cost $250-$275.  Get your own inspector, not the one suggested by the realtor!  I would recommend getting a lawyer to help you with your closing and be sure to ask your realtor lots of questions.

The realtor may tell you that this is not necessary to have a lawyer and say things like this will "slow down the buying process" but you should have a lawyer look at all documents concerning purchase when not exactly sure what those documents mean.  You would'nt chase after a stock going up in price and neither should you chase after a home that the realtor says you need to act on right away.  You should be vary cautious of any realter that approaches you this way!

7. Don't get into one of those creative "balloon interest loans", "interest only loans" or "ARM loans".  Get a "FIXED RATE" loan, preferably a 15 year loan.  Make sure there are NO clauses that allow the bank to reopen the loan should interest rates go up.  We were told this by my wifes credit union even though the loan was a FIXED RATE loan so we disqualified them as a possible lender.  If you can't qualify for a 15 year mortgage, see if the bank will do a 20 year loan instead of the 30 year term.  Ask the lender if they provide a way for you to make an extra monthly payment to your "principal".  Thats the actual money owed.  Lower this and you lower the interest obligation.

I hope that these ideas get you on the right track.  As you can see, there are many things that you must consider so don't be in a rush.  Take your time, ask questions.  Ask the lender about "locking in" interest rates and what it costs to do this.  Make sure that the property you are interested in has all the taxes paid up in full, no second mortgage etc. ( The "DEED is FREE and CLEAR" ).  Again, if you think you are getting in over your head then hire a lawyer.  It is money well spent and it could save much more in the long run.  Never sign anything when you are not 100% sure what it means.  Good luck with your home purchase!

Sincerely,
Ronald Lewis


