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1. Loan-To-Value ratio (LTV)
... a measure comparing the amount of a mortgage to the value of the home to purchase
Mortgage lenders often use LTV to determine risk in extending credit to a borrower.
Lenders favor a loan assessment with a low LTV as it is a lower risk. Contrarily, lenders see a high LTV loan assessment as higher risk and may require the purchase of mortgage insurance to offset that risk.
loan amount / assessed value of the property = LTV ( typically expressed as a percentage)
Example:
the appraisal is $100,000;
mortgage lender offers a loan for $80,000; then,
the LTV ratio = 80%.
2. The 28 / 36 rule (qualification ratio)
... determines qualification based on income.
28 suggests the buyer can qualify for 28% of their gross monthly income (before taxes).
example: $10,000 monthly income qualifies for a mortgage payment of $2,800. (10,000 X 28% = 2,800)
36 considers additional debt payments (student loans, car loans, etc.).
example: $10,000 monthly income - 10,000 X 36% =-3,600
Here, the total debt payment and mortgage combined must be below this amount of $3,600
3. Down payments
Purchasing property often requires a down payment.
sale price x percentage payment = down payment amount
example:
property worth $700,000;
provide the traditional 20% down payment;
total downpayment = $140,000
4. Capitalization rate (cap rate)
... measures a real estate investment property’s profitability to help investors figure out how much money they can make and keep cash flow positive while managing rental properties without taking on too much risk.
To calculate the cap rate: net operating income / purchase price = cap rate
example: rental property costing $800,000 generates $80,000 in rent and costs $20,000 to maintain yearly
($80,000 – $20,000) / $800,000 = 7.5%
NOI - a property's profitability by subtracting operating expenses from its gross operating income (GOI)
GOI - total potential revenue a property generates before deducting operating expenses; the property's "top-line" income
GOI is calculated as: GOI = PGI - Vacancy and Credit Loss
PGI (Potential Gross Income) - total income the property could earn if all units occupied and all rent collected
5. Return on investment (ROI)
... measure of amount made on a real estate investment when sold, calculated as: (final value – initial cost) / cost = ROI
example:
buy a property for $400,000;
later sold for $450,000;
the ROI = ($450,000-$400,000) / $400,000 = 12.5%
6. Prorated taxes
... prorated tax amount at closing, determined by the amount of tax remaining on the property for the calendar year
identify the number of days remaining in the year / 365 = the percentage of the tax bill needed to pay; then,
multiply that percentage by the amount remaining on the tax bill to = the final amount of property tax due at closing.
example:
closing October 1;
annual tax bill is $4,000;
here, 91 days remain in the year;
now: 91 / 365 - 0.249; then,
$4,000 x 0.249 =$996 - being the amount to pay at closing.
https://www.easysurf.cc/ndate6.htm - calendar and days left in 2025
7. Calculations related to mortgage payments
here, calculate cost of borrowing over time, factoring in principal, interest rate, and loan term determining monthly payments and overall affordability.
Principal and interest
mortgage principal = initial loan amount borrowed to purchase a property
example:
$160,000 cash as a 20% down payment on an $800,000 property; then,
the initial loan needed ($800,000 - $160,000) = $640,000; next,
determine the monthly interest rate
you will need to work with a mortgage lender to understand the annual interest rate for the mortgages in your area
once you have the annual interest rate, you can divide the number by 12 to get a monthly rate.
example: if the annual rate is 3%, (3% / 12 X 100) =0.25% monthly interest
Monthly mortgage payment
... determine monthly payment on a mortgage - https://www.mortgagecalculator.org
Monthly Mortgage Payment Formula:
P [ i(1 + i)^n ] / [ (1 + i)^n – 1] = M
M = monthly mortgage payment
P = principal loan amount
i = monthly interest rate
n = total number of payments (assume 30-yr, fixed)
... using the example above, let us state the annual interest rate as 3%; the mortgage payment =
M = $640,000(.0025(1 + .0025)^360)/((1 + .0025)^360 – 1)
M = $2,698
Example 2:
Let's say you have a $200,000 loan with a 5% annual interest rate over 30 years.
P = $200,000
i = 0.05 / 12 = 0.004167
n = 30 * 12 = 360
Using the formula, the monthly payment would be approximately $1,073.64
this formula calculates only the principal and interest portion of the mortgage payment.
Property taxes, homeowners insurance, and potentially private mortgage insurance (PMI) (if the down payment is less than 20%) are usually added to the monthly payment
Property taxes
... expectation of property taxes the government charges automatically
assessed home value x local tax rate = annual property taxes
example:
a property has an assessed value of $350,000;
local tax rate is 1.2%,
$350,000 × 0.012 = $4,200 expected in property taxes to be paid
should also account for potential tax rate changes or reassessments that could impact this amount.
8. Price per square foot
... the value of residential and commercial properties calculated by taking the property’s sales price divided by the square footage.
sale price / square footage = price per square foot
example:
a 2,000 square foot property;
sales price of $400,000; then,
$400,000 / 2000 = $200 per square foot
9. Price-to-rent ratio
... estimate whether it is cheaper (or more expensive) to rent or own property in their area by using the following formula:
median home price / median annual rent = price to rent ratio
example:
property median home price = $450,000;
median annual rent = $30,000; then,
$450,000 / $30,000 = 15
here, generally a ratio under 15 suggests it is more affordable to buy, as over 20 indicates renting is financially sound
10. Gross rent multiplier (GRM)
... helps determine a property’s value from the annual rental income and property purchase price
purchase price or value / gross rental income = gross rent multiplier
example:
property’s value = $200,000;
annual rent income = $24,000; then,
GRM = $200,000 / $24,000 = 8.3
here, compare to other properties in the area to see if the purchase is fair
a lower GRM generally indicates that the property is undervalued
11. The 70% rule
... helps determine whether or not to invest in a property; generally should not invest for more than 70% of the After Repair Value (ARV) minus any renovation costs
(ARV) x .70 − estimated repair costs = maximum buying price (MBP)
example:
ARV = $300,000;
anticipated renovation costs = $40,000;
($300,000 X .70) - $40,000 =$170,000 (MBP)
here, $170,000 should be the highest amount offered for the property to ensure a profitable investment.
1 mill = to 1/1,000th of a dollar or $1 in property tax
1 square foot = 144 square inches
1 square yard = 9 square feet
1 Yard = 3 feet
Area (ft2) = (length ft) x (width ft)
Perimeter = (side) + (side) + (side) + (side)
Section: 1 section = 1 square mile = 640 acres.
1 Acre = 43,560 square feet = 4,046.86 square meters - a measurement of two-dimensional space (area)
1 Mile =1.609 kilometers = 5,280 feet = 1,609.54 meters - a measurement of one-dimensional space (length)
1 Roman Mile = 1,000 paces = 4,854 feet = 1,479 meters
Square Foot: 1 square foot = 144 square inches
Square Yard: 1 square yard = 9 square feet
Area (ft2) = (length ft) x (width ft)
Perimeter = (side) + (side) + (side) + (side)
1 section = 1 square mile = 640 acres
1 township = 36 sections.
Rods: aka a pole or perch, was a standard unit of length, typically 16.5 feet long
Chains: a unit of length used by surveyors, consisting of 100 links, totaling 66 feet
A chain is equivalent to 4 rods, and 10 square chains make up an acre
Surveyors used chains and rods to accurately measure land boundaries, especially when creating metes and bounds descriptions
Metes:
Refers to the measurements of the boundary lines, specifying the distance and direction of each line segment (e.g., "south 23 degrees west for 37 feet").
Bounds:
Refer to the physical landmarks or monuments that define the boundaries, such as trees, rivers, roads, or fences
12. Discount Points:
("buying down the interest rate" or "buy down")
a form of prepaid mortgage interest paid to a lender at closing in exchange for a lower interest rate on the loan
How discount points work:
Cost: 1 discount point typically costs 1% of the total loan amount
Rate Reduction: Each discount point usually lowers the interest rate by about 0.25%
example: if offered a loan at 7.625% interest, paying one point might bring it down to 7.375%
Upfront Payment: discount points are paid as a one-time closing cost
Long-Term Benefit: the lower interest rate resulting from paying points lasts for the entire loan term, leading to lower monthly payments and reduced overall interest costs
Benefits of Paying Discount Points:
Long-Term Savings: Lower monthly payments mean less money spent on interest over the life of the loan
Tax Benefits: The IRS considers discount points prepaid mortgage interest, which can be tax-deductible
generally deductible over the life of the loan, but may be fully deductible in the year they are paid if certain conditions are met.
Quicker Equity Building: a lower interest rate means more of each payment goes towards the principal balance, leading to faster equity growth
Potential PMI Savings: building equity faster can help eliminate Private Mortgage Insurance (PMI) quickly
Drawbacks of Paying Discount Points:
Higher Upfront Costs: points increase the amount of money needed at closing.
Not Ideal for Short-Term Ownership: if you plan to move or refinance in a few years, the savings from the lower interest rate may not outweigh the upfront cost
Delayed Breakeven Point: it takes time for the monthly savings from a lower interest rate to recoup the cost of the points until you pass the "breakeven point"
Cash Availability: paying points requires having the extra cash available at closing, which could otherwise be used for the down payment or other financial goals
Making the Decision:
Calculate the Breakeven Point: Divide the total cost of the points by the monthly payment savings to determine how long it will take to recoup the initial investment.
Consider Your Timeline: If you plan to stay in the home longer than the breakeven point, buying points could be a good investment.
Assess Your Cash Flow: Make sure you have enough cash for the points and other closing costs without jeopardizing your financial security.
Important Note: The reduction in interest rate per point and the overall effect on your mortgage can vary between lenders. Always discuss the options with your lender to determine the best approach for your specific situation.
©Will.iam Halfhill - "Will on the Hill"