A residential home is perhaps the single most valuable asset for an average American family. The most significant aspects of a home purchase are:
- Inflation free housing expense in retirement
- Forced saving in addition to 401(K) contributions
- Generational wealth creation when children inherit the property
But how much do we need to pay for the down payment and monthly mortgage, when the payment needs to include property taxes and hazard insurance? A general rule of thumb is about 0.5% of the property price, with 20% down payment for a 30 year fixed rate mortgage. Of course, the amount varies with interest rate, property taxes and other associated fees. The standard equation for a term of n months is
| Payment = Loan × | i × (1 + i)n |
| (1 + i)n – 1 | |
| where i = (1 + APR/100)(1/12) – 1 | |
However, the computed rate using the above formula does not conform to the amount quoted by the banker or the loan officer. It is alway slightly higher, due to additional fees. In effect, this causes the actual interest rate to be higher than the quoted APR (Annual Percent Rate). The exact formula used by the lender might be proprietary and unpublished. However, we can estimate the payment, and given the monthly payment, compute what the real interest rate we’d be paying. The following calculator does this.