Mortgage Debt Calculations
Joe on March 21st, 2011 | Filed under Finance
Mortgages are a special type of loan characterized by the fact that they are secured against the very property that is being purchased with the loan. Instead of using a separate and distinct property or another type of asset up as as collateral , the mortgage note is conditioned on the house itself. This means that should the borrower fail to meet their payment obligations, the lender can seize the house in lieu of payment. In some states it is even possible for the lender to foreclose on the home and still require the borrower to pay off the debt.
When it is time to figure out how much mortgage a person can afford, and therefore how expensive of a house they can buy, there are several different calculations that come into play. The first is used by most potential homeowners to determine what their monthly payments would be. This calculation takes into account the type and length of the loan as well as the interest rate and other fees.
When the mortgage application reaches the lender, they will perform additional calculations to determine the riskiness of a given loan. This will help them determine whether or not to approve it. The most commonly used is the Debt To Income Ratio . This figures the total debt that a borrower’s household will have, including the new mortgage, versus their net worth. A second calculation, known as the payment to income ratio, looks at the mortgage debt payment against the income of the borrower or borrowers.
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