Mortgage Calculator Terms Explained

By Author: Bonny Kominek
Total Articles: 32
Comment this article

With property prices rising steadily, and lenders still reluctant to offer big mortgages to first time buyers, there has never been a more difficult time to be a first time home buyer. However, the outlook is improving as the economy recovers.

As a rule of thumb, the majority of lenders will be prepared to lend you up to two and a half times your gross annual income. For example, if you were earning 50,000GBP per year, you would probably be able to get a mortgage for around 125,000GBP.

When deciding on a property, you need to find out what a lender thinks you can afford. You can use a mortgage calculator to work this out fairly approximately, but lenders tend to use more complicated calculations that are specific to their firm, so it might be worth trying to get a few quotes as well.

Most mortgage calculators use a few stock terms, such as front end ratio, down payment, and debt to income ratio, to describe some of the numbers used in the calculation. To get the best out a mortgage calculator, you need to fully understand these terms.

Mortgage payments can be divided into four categories. These are ...
... the principal, the interest, the insurance, and the taxes, commonly shortened to PITI. When this is expressed as a percentage of your gross income, it is known as the front end ratio. Most of the time, lenders will set a maximum front end ration of twenty eight percent, but they have been known to make exceptions.

The percentage of your gross income that is spent paying off debts such as credit cards, mortgage payments, and loans is known as the back end ratio. The majority of the time, lenders will refuse to lend if this looks set to exceed 36 percent, but this is not always the case.

The down payment of a mortgage is usually around twenty percent of the purchase price, although some lenders offer down payments of as little as ten percent. At the height of the credit crunch, many lenders were demanding as much as fifty percent, but things have calmed down a bit now.

Buying a property with your partner or a friend can enable you to obtain a much bigger mortgage than you could afford on your own. Also, if you can afford to put down more money up front, you can reduce the size of the loan, which means that you can get a more expensive property than you would otherwise be able to afford. This guide to mortgage calculator terms was written by Bonny Kominek. The Alliance and Leicester website contains a mortgage calculator to help you work out how much a potential mortgage loan will end up costing you.