House affordability refers to the maximum amount you can afford to spend on a house based on your current financial situation, including your income, debts, and other expenses.
To calculate the maximum loan amount:
\[ \text{Maximum Loan} = \frac{\text{Monthly Payment} \times \left(1 - \left(1 + \text{Monthly Interest Rate}\right)^{-\text{Loan Term} \times 12}\right)}{\text{Monthly Interest Rate}} \]
To calculate the monthly payment:
\[ \text{Monthly Payment} = \text{Maximum Payment} - \text{Insurance} - \text{Tax} - \text{Current Debt} \]
To calculate the maximum home value:
\[ \text{Maximum Home Value} = \frac{\text{Maximum Loan} + \text{Down Payment}}{1 + \text{Closing Costs}} \]
Let's take an example to understand the calculation:
Calculations:
\[ \text{Maximum Payment} = 5000 - 100 - 200 - 500 = 4200 \] \[ \text{Monthly Interest Rate} = \frac{4}{12 \times 100} = 0.003333 \] \[ \text{Maximum Loan} = \frac{4200 \times \left(1 - \left(1 + 0.003333\right)^{-30 \times 12}\right)}{0.003333} = 877,480.78 \] \[ \text{Maximum Home Value} = \frac{877480.78 + 40000}{1 + 0.03} = 891,824.08 \]
