Front-End Ratio
  
Ever gone by a construction site and seen the big ol’ backhoes and crawlers with those huge buckets on the front moving dirt and rocks around? Those front-end loaders are amazing; they can really make quick work of big jobs, but if the bucket is overloaded, the machine can’t move (or even worse, it tips over) and the work can’t get done.
Let’s segue this discussion nice and smooth-like into the world of homebuying. To mortgage lenders, our financial sitch is a lot like one of those front-end loaders: the bank might be willing to loan us the money we need to make our dreams of homeownership a reality, but they’re not going to loan us so much that the payments are too heavy for our financial bucket. Said another way, they’re not going to loan us more than they think we can afford to pay back. And one way they figure out how much that is...is by calculating the front-end ratio, or how much of our income would go toward paying our mortgage.
The equation is fairly simple: lenders look at the monthly cost of ownership, including the mortgage principal and interest, HOA fees, property taxes, and any other taxes or insurance costs, and they divide that total amount by our gross monthly income. If the number is less than .28, or 28%, we are a lot more likely to get approved for that loan. There are exceptions: high down payments, good credit scores, the terms of our loan (like, if it’s an FHA loan), etc. And manageable or nonexistent student debt can help us get financed, even if our front-end ratio is higher than 28%.
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Finance: What are the components of a mo...1 Views
Finance Allah shmoop What are the components of a mortgage
payment All right so here's a weird thing about mortgages
When you borrow say four hundred grand buy a home
and say in a six percent fixed thirty year interest
you'll end up paying way more than the four hundred
grand just in interest Renting the money Think about it
Well you'll have a monthly pay payment of twenty four
hundred bucks and by the time you've made thirty times
twelve per year or three hundred sixty payments you'll have
paid some four hundred sixty three thousand dollars in interest
charges Seems like a lot of money to pay out
of your own pocket But since mortgage interest is usually
entirely tax deductible well the rial cost to most home
borrowers is actually meaningful E less than that six percent
interest maybe something closer to a three and a half
four percent something like that So while yes on a
total gross basis you will have paid out more than
the amount borrowed over the thirty year course in the
mortgage you'll also have been forgiven loads of taxes And
for what it's worth over most thirty year time periods
in history the market has gone up about eight to
ten percent a year on average Compound did something like
that So you feel the people mover floor moving fast
underfoot with inflation pushing things around as you go along
Well the money you borrow is the principal of the
loan and that number usually declines by a small amount
each month As you make a flat payment and it's
usually gradually paid off Check out what the principal of
four hundred grand looks like for the first twelve months
of payments right here Note that the flat monthly payment
is twenty four hundred dollars and see how the principal
payed as part of this payment loan thing there goes
from paydown of three hundred ninety eight dollars Teo Well
four hundred twenty a year later right Like you're paying
off principal little by little So you have less that's
attributed to interest And Mohr that's attributed to principal pay
down as you go along and note that this assumes
Ah flat monthly payment here Right You're paying the same
amount You're one you would You're thirty two thousand three
hundred ninety eight dollars and twenty cents on this particular
alone So after a year the amount owed an interest
is well just slightly last Here in this example it's
one thousand nine hundred seventy seven bucks down from in
a two grand and note what it looks like at
the end of each of the first five years That's
a big shift from almost entirely interest do now Principal
being ah meaningful part of it you got after ten
years right here and then at the halfway point in
fifteen years it's here So I noticed that the amount
owed at this point is roughly half the total Why
Because the lion share the pay down went to interest
in the first half of the life of the mortgage
AII those first fifteen years and well then in the
back half way more will be attributed to a principal
pay down than to interest Like check out what the
very last month's payment looks like It's just twelve dollars
of interest and two thousand three hundred eighty six dollars
of principle All of this is principal until well then
the balance is zero and we'll finally Then you will
have fully paid off your mortgage and own your home
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