Mortgage Calculator
Mortgage Calculator
A mortgage calculator is a tool used to determine the monthly payments of a loan on a specific home. If you are considering purchasing a home, an online mortgage calculator can help you determine how much house you can afford based on your income, credit score, and other factors that affect the size of your loan. The best way to use this type of calculator is to list everything that will be part of your monthly payment after closing on the house—including property taxes and insurance—and then compare it to what you currently pay for rent or another loan.
What is a mortgage payment?
A mortgage payment is an amount you pay monthly to your lender to repay a loan. It includes principal and interest payments, plus any other charges such as property taxes or homeowners insurance.
You typically make these payments monthly, though some people may choose to make them biweekly or weekly instead. The term “mortgage” refers only to loans secured by a property—it has nothing to do with how often you make payments.
How to calculate mortgage payment?
You can find out how much your monthly payment is by input all of the costs associated with your loan into the mortgage calculator. The total cost of a mortgage is the sum of three parts:
- Interest (known as “compound interest”) – a portion of the principal (the amount you borrowed) that you pay each month until it is paid off.
- Principal portion – a portion of the principal that decreases as time goes on
- Property taxes, insurance, and homeowners association dues if applicable.
Mortgage payment formula
A mortgage payment is the sum of principal, interest, and taxes. The formula used by the mortgage calculator to compute your monthly mortgage payment is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
The variables are as follows:
- M = monthly mortgage payment
- P = the total amount borrowed from a lender to purchase a home
- i = your monthly interest rate is the percentage you will pay on top of your outstanding balance. Your lender likely lists mortgage rates as an annual figure, so you’ll need to divide by 12, for each month of the year.
- n = the number of payments over the life of the loan.
Benefits of using a mortgage calculator
A mortgage calculator is a powerful tool that can help you make informed financial decisions. Here are some of the benefits of using a mortgage calculator:
- You can calculate your monthly mortgage payment, so you know what your payment will be each month.
- You can see how much extra money you’ll pay in interest over the life of your loan if you make additional payments or pay off other loans instead of paying down this one. That way, when deciding which investments seem like better returns on investment (ROI), it’s easier to compare apples-to-apples: will this investment save me money by reducing my overall interest payments over time?
- You may want to consider making an extra payment toward your principal each month—this can reduce the time required for paying off loans (and thus reduce associated costs).
How do lenders decide how much you can afford?
Mortgage lenders must assess your capacity to repay the sum you wish to borrow. Below are three of the many factors that are part of this assessment:
- Your credit score – Your credit score is a combination of several factors not limited to payment history, the amount owed, the length of time you have been paying off loans, and whether or not you have defaulted on any loans. Lenders use these factors to determine if they should lend money to you. Lenders are more likely to approve your loan request with a high score. However, if your credit score is low, lenders may require additional documentation or even ask for collateral before approving your loan.
- Your income – Lenders look at your monthly earnings to determine how much you can afford. In general, lenders want to ensure that borrowers have enough money coming in each month to cover their debts.
- Your debt-to-income ratio – The sum of debt you owe compared to your monthly income is called your debt-to-income (DTI) ratio. A high DTI means you are using more of your paycheck to pay down your debt than you are earning. A higher DTI shows that you have a lot of debt relative to your income, which makes it harder for you to pay back your loans. Most lenders prefer to see DTIs below 36 percent. You can improve your DTI ratio by cutting back on unnecessary spending or adding extra income to your budget.
Costs included in a mortgage payment
A mortgage payment includes all the costs associated with owning a home. Here are some of them to input into the mortgage calculator:
- Interest rate: The interest rate is the cost of borrowing cash and can be fixed or adjustable. A fixed mortgage rate stays at one level for its entire term, while an adjustable-rate mortgage (ARM) has a lower start rate but will adjust to market conditions during the loan term.
- Property tax: Property taxes are charged based on the assessed value of the home. If you live in a state where property taxes are not due at the same time each year, the amount of property tax will vary throughout the year. In some states, property taxes are only due once per year; however, many states have a two-year tax cycle.
- Insurance: Insurance covers losses to the structure of the house caused by natural disasters, fire, theft, etc. The insurance company pays for repairs or replacement costs. The cost of homeowner’s insurance varies greatly depending on location. Most homes are covered under a standard homeowners policy. However, if your home is located in a flood zone or near a body of water; your insurance may cover additional risks.
How to reduce your monthly mortgage payments?
- Put down 20% or more to avoid PMI.
- Extend your mortgage term
- Buy a less expensive house
- Negotiate a lower interest rate
- Refinance to a lower rate
What can cause your mortgage payments to increase?
As you pay off your mortgage, three key variables will begin to affect your monthly payment.
- Your interest rate can change. As the market fluctuates, so do rates on mortgages. If you lock in a fixed interest rate, your monthly payments won’t change unless there is a change in the term of the loan or some other factor that affects payments.
- Property taxes can increase over time if your local government raises them (though this isn’t common). In most cases, however, homeowners have no control over this increase.
- Home insurance premiums may go up annually as companies update their risk assessments or respond to new legislation passed by Congress or state governments regarding coverage requirements for homes throughout America.
Take away!
It is imperative to know that mortgages are not just loans you take out to purchase a home. The mortgage loan is one of the most common types of financing used for buying a house or investment property, but there are many other options available. We hope this article about the mortgage calculator has helped you learn more about how mortgage loans work and how they can benefit your life and save money on interest payments over time!