Borrowing Capacity Home Loan Calculator

Borrowing Capacity Formula:

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

Borrowing Capacity (P):

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1. What is Borrowing Capacity?

Borrowing capacity refers to the maximum amount a lender is willing to loan you based on your ability to repay. It's determined by factors including your income, expenses, interest rates, and loan term.

2. How Does the Calculator Work?

The calculator uses the present value of an annuity formula:

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

Where:

\( P \) — Loan amount (borrowing capacity)
\( PMT \) — Monthly payment amount
\( r \) — Monthly interest rate (annual rate ÷ 12)
\( n \) — Total number of payments (term in years × 12)

Explanation: This formula calculates the present value of a series of future payments (your monthly mortgage payments) discounted at the loan's interest rate.

3. Importance of Borrowing Capacity

Details: Understanding your borrowing capacity helps you determine what price range you can afford when house hunting and prevents you from looking at properties outside your budget.

4. Using the Calculator

Tips: Enter your comfortable monthly payment, the current interest rate, and your desired loan term. The calculator will show you the maximum loan amount you could qualify for based on these inputs.

5. Frequently Asked Questions (FAQ)

Q1: Is this the exact amount I can borrow?
A: This is a mathematical calculation. Actual loan amounts may vary based on lender policies, your credit score, and other financial factors.

Q2: Should I borrow my maximum capacity?
A: Not necessarily. It's often wise to borrow less than your maximum to allow for interest rate rises or changes in your financial situation.

Q3: How does interest rate affect borrowing capacity?
A: Higher interest rates reduce borrowing capacity as more of each payment goes toward interest rather than principal.

Q4: What about other costs like insurance and taxes?
A: This calculator focuses on principal and interest. Remember to account for property taxes, insurance, and maintenance in your budget.

Q5: How accurate is this calculator?
A: It provides a good estimate for standard loans, but may not account for all loan features (e.g., balloon payments, adjustable rates).