### Written by Ricardo Oliveira

Ricardo is a software engineer at Faira (and also the first employee!)

*An illustrated guide to help you follow the down payment articles with your own numbers*

Welcome to our illustrated guide on how to use the Faira down payment calculator!

If you haven’t checked out the other articles in this series yet, head over to the introduction for a summary and links. Download the Excel spreadsheet “Faira down payment calculator” and let’s begin!

You will input your own numbers in the cells with a white background and black border. **Example:**

The cells with a gray background show you results of calculations. **Example:**

**Annual income**: type in your total annual income before taxes. If you are going to buy a home with someone else, add up both incomes for this figure.**Interest rate**: we’re assuming a 30-year fixed rate loan as the basis to calculate everything else. You may end up using a different type of loan when you buy your home, but can still use these results as reference values. Rates change over time and by location, you can get a notion of where they stand at https://www.bankrate.com/national-mortgage-rates/**Savings:**after you type in your current savings, the percentage to the right will indicate how much that represents vs your annual income. In one of our articles we talk about how to gauge your savings using that metric.**Rent**: type your total rent + misc apartment complex fees. The percentage to the right will show how much rent is costing you. Apartment companies might enforce that you can’t commit more than X percentage of your income to pay rent. This limit can vary between 33% and 50% depending on the company, but if you’re trying to save for down payment, you probably want to spend less than that.**Monthly savings**: since we’re measuring many other things as a percentage of your income, it’s useful to know your saving rate in the same metric. When you set high-priority saving goals for yourself, you can also use this percentage to see how it fits into your budget (more on this later).**Home price**: depending on the source, you might hear that your target price should be between 200% and 250% of your income, or 400% to 500%, or something else. We will calculate your maximum purchase power soon, but it’s interesting to see at this point how big your “dream” is.**Down payment**: generally, a down payment of 20% or more of the home value gives you a standard loan. When you put a lower down payment, your lender might require that you pay Private Mortgage Insurance (PMI) in addition to your mortgage. You can see the actual percentage to the right of the number you type, plus we’ll also show how many months / years it will take to save that much given your current savings and how much you’re saving every month.

In this section, you don’t have to type many numbers, only tweak a couple to get a more accurate result.

**Maximum housing payments**: we’re applying the 28% rule (described in the articles) to calculate how much that represents in actual dollars. Nothing to input, this is just for your information.**Maximum home purchase price**: this is the big takeaway from this section. Assuming you are limited by the 28% rule, if you buy a home at this price and give a 20% down payment, your monthly costs will add up to this limit. This represents your maximum purchase power. Later, we’ll calculate your current purchase power when we consider other things such as any existing debt you might have. In the example below, the maximum you can afford ends up close to 500% of your annual income.**Down payment**: this is the down payment to maximize your purchase power. Saving more than this doesn’t let you borrow more, since you are still limited by your monthly payment cap. Saving less than this implies you’ll pay PMI and “consume” your monthly cap, reducing the price. You can use this as a guideline to set your own goal.**Loan amount**: conversely, since the down payment represents 20% of the purchase price, then the loan represents 80%. This is the mortgage principal that will be paid over time.**Principal + Interest**: on a fixed rate loan, you make equal payments every month. In the beginning, a big chunk of the payment is used to cover the interest (how much the principal grows), and the rest pays some of the principal. Over time, more and more of the same payment amount shifts towards paying the principal. The total amount you’ll be paying every month contains two other costs, though: taxes and insurance.**Property taxes**: usually you must pay around 1% of your home value in taxes every year. For an idea about how high property taxes are in your State, check https://taxfoundation.org/how-high-are-property-taxes-your-state/, but if you want even more accurate information about where you live, you’ll have to check your county’s website. To use a value different than 1%, input it in the white space to the right and the numbers will update. For example, changing the property taxes to 0.8% per year updates many of the values above, including the maximum home purchase price:

**Insurance**: the cost of insurance varies per location since there are differences in potential hazards, construction costs (to rebuild or fix), home size, etc. There’s a rule of thumb of $35 per $100,000 of home value, but it can underestimate or overestimate your actual costs. Besides shopping for actual quotes, you can look up news about average insurance costs in your area or just talk to other homeowners to get a feel of what they pay.

The idea of this calculator is to help put your savings into perspective, so you can focus on achieving your homeownership goals. This section starts from the high-savings numbers discussed in our article, but you can adjust things up and down to match your financial situation.

The categories we’re using are just the typical highest spending categories on average, according to data from the Bureau of Labor Statistics (BLS). If you’re going to think about what you can do to help you save, you might as well think about big ticket items!

Each one of them should be smaller and smaller as a percentage of the pie, but individual circumstances might allow you to spend less on some and require you to spend more on others in comparison to the average person, so your order might not go perfectly from the largest to the smaller, that’s ok.

**Rent**: the assumption is that housing is currently your highest expense, possibly higher than 30% of your income (*remember when you entered your rent in step 1?*). It might be a good idea to set a budget for rent that gives you room to save more. Enter a percentage on the right-hand side and the actual dollar amount will be calculated for you.**Savings**: following the idea from one of our articles, you are aiming to make savings become one of your highest priority budgets. Saving to buy a home is important to you, reflect that importance in your budget! If you end up having to reduce your savings budget to make room elsewhere, try to keep it as the second-highest category. This will give you an incentive to “spread the load” without giving up on your goal.**Taxes**: since all these calculations are based on the income before taxes, you need to account for taxes somewhere. Have a look at your income taxes for recent years and find out the effective percentage that they represent, that should give you a starting point. Although your tax events and collection may happen at different times of the year, entering the final percentage here is useful to figure out how much is truly available for other categories. You don’t want surprises.**Transportation**: for cars, remember that this budget must cover leases/loans, fuel, insurance, maintenance, parking and toll costs. If you use public transportation, remember the occasional taxi on weekends or nights. Watch out for the balance between rent and transportation: try not to pay too much just because you’re close to your points of interest, but also don’t live too far to try to save some money if it will still cost you the same or more to move around.**Food**: of course, it doesn’t make sense to starve yourself to afford a home. This should represent your regular business day meals as well as your dining out experiences. Although we’re using percentages here, the truth is that your lifestyle will have a strong influence on the amount you spend per person / per day, and this percentage will just have to adjust itself to that.**Healthcare**: it’s hard to predict how much you’ll spend in healthcare ahead of time since many factors are outside of your control. But, if you have any regular costs, payment or co-payments, take them into consideration and give yourself some room for the unpredictable.**Everything else**: There are many other categories that get smaller and smaller (entertainment, clothing, etc) and it’s hard to keep track of all of them, so at some point you must group them together into “Everything else”. In this calculator, “Savings” comes as close to the top as possible and “Everything else” is literally what remains after your big expenses, so it is automatically calculated for you.

It’s time to put everything together. We’ll use some of the numbers from steps 1-3 plus unlock a couple more variables to consider down payments lower than 20% and any existing debt you might have.

There are many fields here that work similarly to Step 2. We’ll call out the differences.

You can experiment with the numbers here and see the effects on your purchase power and in your buying speed, then decide on a realistic, personal plan for yourself.

**Maximum housing payments**: we’re applying the 28% rule again for the housing payments, but we’ll also use the 36% rule for total debt payments. In the lines below, you’ll see one of them max out at the 28% amount or at the 36% amount depending on whether the debt payments are truly affecting your purchase power or not.**Maximum home purchase price**: instead of showing how the maximum compares to your annual income, we have opted to show how it compares to the theoretical maximum calculated before. This should give you an idea of the purchase power reduction that the other factors are causing. In the pre-filled spreadsheet example, the purchase power of $310,822 represents 72% of the purchase power that had been calculated on step 2.**Down payment**: this time around, we’re letting the down payment amount be adjusted. Notice that as you adjust the percentage here, you should also scroll down to “Monthly: Private Mortgage Insurance” and adjust that too. There’s no formula to easily tell what value to use there, so the calculator can’t do it automatically for you.**Private Mortgage Insurance (PMI)**: lenders have different rules based on their risk tolerance to evaluate how much they will require in PMI. They will evaluate the range of your down payment (5-10%, 10-15%, 15-20%). The lower the range, the higher the PMI. Also, your credit score plays a role in the risk assessment, and sometimes other characteristics that the mortgage insurance providers consider relevant. PMI can vary from as low as 0.5% to as high as 2.0% of the loan amount per year. When you adjust the “Down payment” percentage above, make sure to tweak the PMI percentage here as well. You may use various websites research how much PMI you would have to pay, for example https://www.hsh.com/calc-pmionly.html**Housing payments**: if the total here adds up to the maximum, you will see a 28% on the right-hand side. It means that debt isn’t affecting your purchase power, so you’re only limited by the 28% rule.**Other debt**: include the total monthly payments you must make for debt unrelated to housing. Remember that both car leases and loans are debt payments, student loans, rolling credit card debt payments and any other personal loans you have. If this total represents less than 8%, there will be no impact on your purchase power.**Total debt payments**: this puts together your housing payments and your other debt payments. When your other debt payments are higher than 8%, this total will hit the limit of 36%, causing a reduction in the purchase power.**Months saving**: we compare how many months it will take you to save enough for the down payment, using both your*original*monthly savings (you typed that on step 1) as well as the monthly savings budget you*planned*(on step 3). If the original savings rate is good enough for you, maybe you just keep doing what you’re doing. If you see a significant difference in the two amounts of time, that might give you the motivation you need to stick to your new savings objective!**Example**: by putting only 5% down payment and paying 1.5% of the loan amount in PMI, the purchase power of this buyer is limited to $310,822. The amount necessary for down payment is low and this buyer already has some savings, so there isn’t a significant difference in the amount of time it will take before this buyer can afford to move forward.

**Example**: by putting 20% down payment and not paying PMI at all, the purchase power of the same buyer is increased to $432,753. The down payment requirement is higher, so it will take over 6 years of savings at the current rate to get there. However, with the newly budgeted savings, this buyer could cut that time down in half!

Ricardo is a software engineer at Faira (and also the first employee!)

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