Q:

How are mortgage loan formula calculated?

A:

Quick Answer

Mortgage lenders use principal, interest, taxes and insurance (PITI) in a mortgage loan formula according to Investopedia, an investment education service. Additionally, financial services use credit scores, household income and property values to determine eligibility for mortgage loans.

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How are mortgage loan formula calculated?
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Full Answer

Principal is the largest PITI component. Lenders are more at ease with borrowers able to make a 20 percent down payment according to LearnVest, a financial planning service. The next component, interest, is the cost of getting a mortgage. Individual financial history and current rate trends determines individual loan rates.

Taxes are important for their role in property values. Lenders may require two types of insurance. Homeowners' insurance protects against disasters. Lenders require private mortgage insurance especially if borrowers are unable to make a down payment according to LearnVest.

Mortgage sources recommend planning beforehand to ensure affordable mortgages. Lenders typically look for mortgage payments should fall within 25-45 percent of gross income according to Mortgage Calculator, a nonprofit mortgage education service. Besides PITI, lenders look for credit scores minimums of 640-650. They review property values to insure potential homes fit PITI guidelines.

Using a mortgage specialist, bank or the numerous online mortgage calculators help borrowers determine which loan type: adjustable, 15-year fixed or 30-year fixed rate best fits their needs. Finally, using a budget and net income help borrowers to obtain realistic and affordable mortgages.

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