The tool compares your current monthly mortgage payment with current monthly household income to calculate a debt payments-to-income ratio. The same approach is used to compare your current total debt payments to current monthly household income. For users who rent rather than own their own home, rent is not treated as a long term debt but does factor into the debt to income ratios as your monthly income is reduced by your monthly rent payment. In a similar manner, auto lease payments are not treated as debt but do reduce monthly income for use in the debt to income ratio calculation.
The tool computes an estimated projection of outstanding debt at the expected retirement age and the number of years remaining on the debt after attaining the expected retirement age. These calculations are performed for mortgage debt, credit card debt and other consumer debt. The number of years remaining on the mortgage is estimated based on the remaining balance, monthly payment and interest rate. Mortgage payments normally include escrow payments for taxes and insurance. You should not enter the escrow amount in the payment amount on the tool in order to get a more accurate estimated remaining balance and number of payments. You can check the terms of your mortgage to verify the actual payoff date and number of payments left at your estimated retirement age. The number of years remaining on consumer debt is calculated based on the remaining balance, monthly payment and interest rate of the credit cards and other debt that you entered.
The following assumptions are made in performing these calculations.
Mortgage Debt Assumptions
Mortgages are assumed to have no longer than a 30 year term at a fixed rate and fully amortize in that time frame. If the user enters mortgage information that leads to a time to payoff greater than 360 months an error message will alert the user to the situation.
Mortgage information that leads to a payoff shorter than 360 periods is allowed with the assumption being that the user has held the mortgage for some time already.
The monthly payment entered for mortgages does not include escrow payments for taxes and insurance.
The tool provides for only one mortgage. Your debt situation will be understated if you have more than one.
All mortgage calculations assume a fixed interest rate. If the rate varies the tool may understate the impact of debt on your retirement assets because it doesn't account for potential rate increases.
The tool assumes no refinancing of the mortgage.
Rent is not treated as a long term debt but does factor into the debt to income ratio calculation as monthly income is reduced by the monthly rent payment.
If you pay less than the interest on a loan, the outstanding balance increases and the loan is never paid off. This is sometimes referred to as negative amortization. To prevent negative amortization, the minimum advisable monthly payment is assumed to be the monthly interest amount or the loan balance times the monthly interest rate.
Credit Card Assumptions
Up to six credit cards may be entered at a time.
Cards are to be included only if a balance is being carried on that card.
The tool assumes one APR for a given credit card balance and does not factor in introductory, promotional, or cash advance rates.
If the balance, monthly payment, and interest information entered leads to a negatively amortizing card an error message will alert the user to the situation. Negative amortization is caused by paying less than the interest due on the card causing the outstanding balance to increase, resulting in the card never being paid off.
Other Consumer Debt Assumptions
If the balance, monthly payment, and interest information entered leads to a negatively amortizing debt an error message will alert the user to the situation. Negative amortization is caused by paying less than the interest due on the debt causing the outstanding balance to increase, resulting in the debt never being paid off.
Auto leases are not considered as long term debt but, like rent, do reduce monthly income used in the debt to income ratio calculation.
All consumer debt calculations assume a fixed interest rate.
The tool assumes no refinancing of any debt.
The tool assumes that no new debts are incurred.
The projection of consumer debt at retirement assumes that no additional significant debt is incurred and that the payment amounts entered for each credit card or loan remain constant for the duration of the obligation. Paying less than that amount could result in an understatement of projected debt at your retirement age.
Interest rate changes are not taken into account.
General Debt Assumption
The debt-to-income ratios will be rounded to the nearest whole percentage.
Paying additional money beyond regular debt payments for mortgage and consumer debt is not accounted for during the initial data input. However, additional payments may be entered in the "What If" area of the Results page.
A monthly payment amount up to the outstanding balance less the regular monthly payment may be entered.
Prepayments are on a debt by debt basis and the prepayment extends only for the duration of each individual debt. Therefore, prepayment amounts end when the associated debt is retired.
Only positive numbers may be entered in the "Addition" entry boxes. Negative numbers will not be accepted.
A warning message will be displayed when the total of regular monthly debt payments plus prepayments exceeds total monthly disposable income.
Household Income Assumptions
The total annual household income information provided is your pre-tax income from salary and wages from employment.
Total annual household income is used to determine your debt payment to income if you are employed full-time. If you are “Already Retired”, the tool won’t calculate debt to income ratios because you no longer have income from full-time employment.
Rent and auto lease payment(s) are deducted from the entered total annual household income for use in the debt to income ratio calculations.
What If Calculations
The interest saved when making prepayments is taken over the life of the loan.
Note that in prepayment scenarios the principal repayment is identical, only the amount of interest paid can vary.
Debt to Income
The debt to income ratios displayed in the Current Debt Details table reflect only current debt payments and do not take into account subsequent prepayment from "What if?" testing.
All debts are calculated on a monthly basis while the chart shows annual values.
The first year vertical bar corresponds to the current month and subsequent vertical bars are snapshots taken at 12 month increments.
The monthly interest rate is derived by taking one twelfth of the annual rate.
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