Can future rental income be applied to present debt-to-income ratio when applying for second mortgage?
They will include the rental income into the calculation. They don't give you a 100% credit for the income because they have to factor that you might have a gap between tenants.  Years ago they only credited me with 66% of the expected monthly income.  Example: This expense was then supposed to come from the 10% of my income that was allocated for monthly non-principal mortgage loans, e.g student loan, auto loan, credit card debt... Having both purchased income properties and converted prior residences into rental properties I have found that it is difficult to get the banks to consider the potential rental income in qualifying you for a loan.  It helps if you have prior rental experience but in many cases you will have to qualify outright (i.e. without consideration of the potential income).  The early 2000s were great for responsible borrows/investors but today's regulations make it much more difficult to finance income property. Generally speaking, no they won't. In this case, though I haven't done it myself, I was recommended to put the mortgage on the real estate after it's been leased out and has a contract on it.  Then, yes, they will use it for that.  But, ex-ante don't expect any bank to count on income from it because, at that point, there's zero guarantee you'll get it leased, and even if you do, at what rate.
"Mortgage is a (secured) debt, a combination of a promissory note, and a security interest providing the mortage holder a secured interest in the property. Yes, you are ""in debt"". But that depends upon whether you define the term ""in debt"" as a debt appearing on the balance sheet, or the net of assets - liabilities is less than zero, whether you have a ""debt"" expense on the income statement (budget), or whether the net of income - expenses is less than zero. One person might look at their budget, find the (monthly) mortgage payment listed, and judge that they have a debt payment, and thus are ""in debt"". Or they might look at their expenses, find they exceed their income, and judge that they are ""in debt"". Another person might look at their balance sheet, compare assets to liabilities, and only say they were ""in debt"" when their liabilities exceeded their assets. Some people view mortgage debt as ""good debt"", as they view certain debts as ""good"" and others as ""bad"". Trust me, having a high mortgage payment (higher 30% of your net income) is hard, and over 40% is bad. Consider you balance sheet and your income statement.  On your balance sheet, the house appears on the ""asset"" side with an (estimated) value, while the ""mortgage"" (really, the promissory note part of the mortgage) appears on the ""liability"" side. On your income statement, your house does not appear on the income side, but the mortgage (promissory note) payment appears on the expense side. So, you clearly have both a ""liability"" with a clearly-defined value and an ""expense"" with a clearly-defined payment. But do you have an ""asset""? According to an accountant, you have an ""asset"" and a ""liability"". But you do not have a business asset that is producing revenue (income), nor do you have a business asset that can be amortized and expensed to reduce taxable income. When we think about an asset, does the word have the connotation of some thing with value, something that produces income?  Well, by that measure, a house only provides income when we rent it out, and only has value when we consider selling it. As millions of families discovered during the housing (price) collapse, when the market price of your ""asset"" falls substantially, your personal financial status can fall negative and you can be ""broke""." "All very good answers for the most part, but I have a definition for Good and Bad debt which is a little bit different from those mentioned here so far. The definitions come from Robert Kiyosaki in his book ""Rich Dad Poor Dad"", which I have applied to all my debts. Good Debt - Good Debt is debt used to fund a money making asset, an asset which puts money into your pockets (or bank account) each month. In other words the income produced by that asset is more than all the expenses (including the interest repayments on the debt) associated with the asset. Bad Debt - Bad Debt is debt used to fund both money losing assets and non-assets, where the interest repayments on the debt are more than any income (if any at all) produced by the goods or services the debt was used to purchase, so that you need to take money out of your pockets (or bank account) each month to sustain the debt. Based on this definition a mortgage used to purchase the house you live in would be classed as bad debt. Why? Because you are making interest repayments on the mortgage and you have other expenses related to the house like rates and maintenance, but you have no income being produced by the house. Even a mortgage on an investment (or rental) property where the rent is not enough to cover all the expenses is considered to be bad debt. For the debt on an investment property to be considered as good debt, the rent would have to cover the full interest payments and all other expenses. In other words it would need to be a positively geared (or a cashflow positive) asset. Why is this definition important in distinguishing between good and bad debt? Because it looks at the cashflow associated with the debt and not the profit. The main reason why most investors and businesses end up selling up or closing down is due to insufficient cashflow. It may be a profitable business, or the value of the property may have increased since you bought it, but if you don't have enough cash every month to pay the bills associated with the asset you will need to sell it. If the asset produces enough cashflow to pay for all the expenses associated with the asset, then you don't have to fund the asset through other sources of income or savings. This is important in two ways. Firstly, if you are working and suddenly lose your job you don't have to worry about paying for the asset as it is more than paying for itself. Secondly, if you don't have to dig into your other source/s of income or savings to sustain the asset, then theoretically you can buy an unlimited number of similar type assets. Just a note regarding the mortgage to buy a house you live in being classed as bad debt. Even though in this definition it is considered as bad debt, there are usually other factors which still can make this kind of debt worthwhile. Firstly, you have to live somehere, and the fact that you have to live somwhere means that if you did not buy the house you would probably be renting instead, and still be stuck with a similar monthly payment. Secondly, the house will still appreciate over the long term so in the end you will end up with an asset compared to nothing if you were renting. Just another note to mention the definition provided by John Stern ""...debt is a technology that allows borrower to bring forward their spending; it's a financial time machine..."", that's a clever way to think of it, especially when it comes to good debt." "Your first question has been answered quite well already. To answer your second question: ""If you pay extra, do you want the extra to go toward the interest or   toward the principal?"" This gives the consumer some flexibility to decide how additional payments are applied. It might seem like a no-brainer to always apply extra payments towards principal - that way, the interest amounts on future payments will be lower and (if you're billed a fixed amount each month) more of each regular payment will then be applied to principal, shortening the term of the loan. However, while it would mean spending more over the life of the loan, there are certain advantages to applying extra payments towards interest†. The main advantage is that it pays your account ahead and means you don't have to make another payment as soon. You could use this strategy to give yourself a buffer of several months, so that if you should ever run into financial hardship you can stop making mortgage payments for a while without the risk of foreclosure. † Note, in most cases it's more likely that you are simply paying more without specifying to the lender that it should be used as principal curtailment. I haven't seen cases where you can explicitly ask the extra to be ""applied toward interest"". In this situation the funds would be held until you've provided enough to cover one or more monthly payments in full, at which point your ""next payment due"" date will simply be extended.  Another advantage is that the funds that are being held (not due yet, not allocated toward any specific payment, maybe held in escrow) may be refundable to you, upon request. This would depend on the lender's policy. Some will permit refunds of credit balances that go beyond what is necessary to cover the current month's bill. Whether you apply extra payments towards principal or not, it makes little difference to the bank. Any additional payments received increase their immediate cash flow. The cash can be reinvested immediately by them into whatever they are currently focusing on." There are several things that are missing from your estimate: The terms for the mortgage for a rental property will be different. You may be required to have a larger down payment. When approving you for the mortgage they will not count all the rental income as income, they will assume periodic vacancies. This difference may impact other credit you will be getting in the near future. "You are asking if getting a mortgage nearly 4X your income has the potential to make you ""house poor"". $2500 Of your $9000 gross is not too much according to the bank, but the bank only looks at a few ratios, not your entire budget. Is this house appropriate for your needs? At 3X the median home price, are you reaching too high? Note - this board has had multiple ""budget"" discussions recently. For many people, the mortgage is just where the trouble starts. The other house related budget items just multiply up to make things worse." The percentage of gross income is a quick and easy way to arrive at the rough ballpark figure of the mortgage one can afford. The net income is something which one does not know offhand. If you want to seriously evaluate then most of the standard mortgage calculators will ask you to enter your gross income, your other liabilities like Auto Loan, Student Loan, personal Loan, Card Payments, Any other regular payments like Child Support etc. After factoring all these one arrives at the actual mortgage one can afford. As is evident, the above requires a good amount of calculation and hence the preffered method becomes on the basis of gross income. Not applicable.  Or, at least totally unrealistic.  Lots of assumptions about returns, no discussion of time frames, and no discussion of volatility.  If it's a personal choice you wouldn't do it this way, plus there are other factors to consider.  As far as the math of the question, you use a discount rate that allows you to account for alternatives, typically a RFR, but again, that doesn't apply to an individual quite in the same way since it's not a debt vs equity question. You did borrow money for the downpayment.  When you apply for a mortgage loan on your new home, you will be required to list all your assets and all your liabilities. You must disclose the first mortgage as well as the second mortgage on your current condo as well as the monthly payment on each of these loans.  If you took out the second mortgage five years ago, you can truthfully say that you have not taken out any loans within the past year to get cash for the down payment when you apply for a mortgage for purchasing your new house. But, what the lender will be looking at is: Can  the applicants' current income support monthly payments of   $1000 for the first mortgage on the condo plus $300 for the second   mortgage on the condo plus $1500 for the proposed mortgage on the   new house? You might argue that you will be selling that condo soon, or will be renting it out and that the rental income will cover the mortgage payments on the condo, but will the lender give much credence to this? The condo may not sell easily, you might not be able to find a tenant right away, or be able to rent the condo at a high enough rental to cover the costs etc. If you simply save money from your current extra cash flow and use that to make the down payment, the lender will be pondering the question Can  the applicants' current income support monthly payments of   $1000 for the mortgage on the condo plus $1500 for the proposed mortgage on the new house? Which deal will the lender be happier with? If you are uncomfortable saving your extra cash flow in a savings account or CD or investing it in stocks and/or bonds until you need the money for the down-payment on your new house, put that money in a sock under your mattress (and don't smoke in bed!)