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Borrowing Calculator Home Loan

Borrowing Capacity Formula:

\[ P = \frac{PMT}{r} \times \left(1 - (1 + r)^{-n}\right) \]

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1. What is the Borrowing Capacity Formula?

The borrowing capacity formula calculates the maximum loan amount (principal) you can afford based on your comfortable monthly payment, interest rate, and loan term. It's derived from the standard loan payment formula solved for principal.

2. How Does the Calculator Work?

The calculator uses the borrowing capacity formula:

\[ P = \frac{PMT}{r} \times \left(1 - (1 + r)^{-n}\right) \]

Where:

Explanation: The formula calculates the present value of a series of future payments (PMT) discounted at rate r over n periods.

3. Importance of Borrowing Capacity

Details: Knowing your borrowing capacity helps in home buying by setting realistic price ranges and ensuring mortgage payments remain affordable.

4. Using the Calculator

Tips: Enter your comfortable monthly payment, annual interest rate, and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Does this include taxes and insurance?
A: No, this calculates principal and interest only. Add 1-2% of home value annually for taxes and insurance.

Q2: How does loan term affect borrowing capacity?
A: Longer terms increase capacity (more payments) but cost more in total interest.

Q3: What's a good debt-to-income ratio?
A: Most lenders prefer housing payments ≤28% of gross income and total debt ≤36%.

Q4: How accurate is this calculator?
A: It provides a good estimate but actual loan amounts may vary based on credit score, down payment, and lender policies.

Q5: Should I borrow my maximum capacity?
A: Not necessarily. Consider future expenses, emergency savings, and potential rate increases when deciding.

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