What you'll learn:
➤ How to Use a Mortgage Calculator
Calculating your mortgage payment is easy with our helpful tool. Here’s how it works:
- Home Price: If you’re buying a home, enter its price or just enter the mortgage amount. If you’re refinancing, put in the current value of your home. Our refinancing calculator can also be handy.
- Down Payment: For homebuyers, this is the cash you pay upfront. If you’re refinancing, it’s the equity you have in your home – that’s the value of your home minus what you still owe.
- Interest Rate: On a computer, type in your interest rate to the right. If you’re using a mobile device, tap “Refine Results” to find the interest rate field.
- Loan Term: Set the length of your mortgage in years. On a computer, use the plus and minus signs. On a mobile device, use the same signs after tapping “Loan term.”
- Additional Details: You can customize the calculator further (if it supports it). Add your property taxes, homeowners insurance, and homeowners association fees. You can even edit the estimates if you prefer.
- Comparison and Amortization: If the mortgage calculator has more features, click “Compare common loan types” to see different loan options. If you’re curious about how your payments change over time, click “Amortization” to see the balance, equity, and interest year by year.
Using our mortgage calculator is a breeze – it helps you understand your mortgage payments easily.
➤ How to Calculate Your Mortgage Payment
The formula for figuring out your mortgage payment is as follows: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]. Let’s break it down:
- M: This is your monthly mortgage payment.
- P: Represents the principal amount of your loan.
- i: Stands for your monthly interest rate. Usually, lenders provide interest rates on a yearly basis. To use it monthly, divide it by 12. For example, if your rate is 5%, the monthly rate would be 0.05/12 = 0.004167.
- n: Refers to the number of payments throughout the loan’s life. If you have a 30-year fixed-rate mortgage, n would be 30 years x 12 months per year, equaling 360 payments.
Using this formula helps you understand how your mortgage payments are calculated.
➤ Why Use a Mortgage Calculator?
Understanding your potential monthly house payment is a crucial step in determining your affordable home budget. This payment typically constitutes the most significant portion of your living expenses.
Using the mortgage calculator from Thoughts.Money allows you to estimate your future mortgage payment whether you’re purchasing a new home or refinancing. You can modify loan details in the calculator to explore different scenarios. This tool aids in making decisions like:
- Choosing the Right Loan Term: Opting for a 30-year fixed-rate mortgage can lower your monthly payment, but it may increase your total interest paid over the loan’s lifespan. Conversely, a 15-year fixed-rate mortgage reduces overall interest payments, but comes with higher monthly payments.
- Considering an ARM: Adjustable-rate mortgages start with an initial “teaser” interest rate and then fluctuate over time, either upwards or downwards. A 5/1 ARM might be suitable, especially if you plan to live in the home for a shorter period. You should be cautious about potential changes in your monthly payment once the initial rate expires, especially if interest rates are on the rise.
- Evaluating Home Affordability: The mortgage payment calculator serves as a reality check, offering insight into your expected monthly expenses while considering additional costs like taxes, insurance, and private mortgage insurance.
- Determining an Adequate Down Payment: With minimum down payments as low as 3%, it’s more accessible than ever to put down a smaller amount. The mortgage payment calculator assists you in figuring out the optimal down payment based on your circumstances.
➤ How Much Can I Borrow?
When you’re seeking a mortgage, lenders are obligated to evaluate your ability to repay the loan amount. This evaluation involves considering various factors, with the primary one being your debt-to-income ratio.
Your debt-to-income ratio indicates the portion of your pre-tax income that’s allocated to monthly debt obligations, encompassing your mortgage, car payments, student loans, minimum credit card payments, and child support. Lenders view more favorably those with debt-to-income ratios of 36% or lower—equivalent to a maximum of $1,800 per month on a $5,000 monthly income before taxes.
➤ Mortgage Payment Explained Simply
A mortgage payment isn’t just about repaying the borrowed amount; it also encompasses several other expenses. Here’s what makes up your monthly mortgage payment:
- Principal: This is the initial amount you borrowed. Every payment reduces the outstanding principal.
- Interest: Lenders charge this fee for lending you money, expressed as an annual percentage rate.
- Property Taxes: Governments assess an annual tax on your property. Your monthly payment covers a portion of this tax, stored in an escrow account, and paid by the loan servicer when due.
- Homeowners Insurance: This policy safeguards against damage from events like fires or storms. You pay a portion of the annual premium each month, and the servicer handles payment upon due date.
- Mortgage Insurance: If your down payment is less than 20%, you’ll likely pay mortgage insurance to protect the lender’s interests. Once your property’s equity reaches 20%, this insurance is usually canceled, except for FHA loans.
- Homeowners Association (HOA) Dues: If you’re part of an HOA, dues may be billed separately. To ensure you consider this cost, use a mortgage calculator that includes it.
Understanding these components helps you accurately estimate your overall monthly mortgage payment.
➤ How to Lower My Monthly Mortgage Payments
The mortgage calculator empowers you to explore ways to decrease your monthly payments:
- Extend the Loan Term: Choosing a longer repayment period reduces your monthly payment, but you’ll pay more interest overall. Examine your amortization schedule to understand this impact.
- Opt for a Smaller Home: A smaller loan amount means a lower monthly mortgage payment.
- Avoid Private Mortgage Insurance (PMI): A down payment of 20% or more eliminates the need for PMI. Maintaining 20% equity when refinancing also helps sidestep PMI.
- Secure a Lower Interest Rate: A higher down payment not only helps avoid PMI but also qualifies you for a lower interest rate, ultimately leading to a reduced monthly payment.
➤ Monthly Payments Can Go Up
Be aware that your monthly payment might increase due to:
- Rising Property Taxes or Insurance Premiums: These costs are often included in mortgage payments.
- Late Payment Fees: Missing a payment may result in late fees from your mortgage loan servicer.
- Adjustable-Rate Mortgage Adjustments: If you have an adjustable-rate mortgage, your payment could rise during the adjustment period if interest rates increase.
➤ Key Things to Consider
| Strategies to Lower Monthly Payments | Potential Increases in Monthly Payments |
|---|---|
| 📆 1. Extend the Loan Term | 📈 1. Rising Property Taxes or Insurance Premiums |
| – Longer term reduces payment, more interest | – Costs often included in mortgage payments |
| – Check amortization schedule for impact | |
| 🏠 2. Opt for a Smaller Home | 💸 2. Late Payment Fees |
| – Smaller loan amount, lower payment | – Late fees from mortgage loan servicer |
| 🚫 3. Avoid Private Mortgage Insurance (PMI) | 🔒 3. Adjustable-Rate Mortgage Adjustments |
| – 20% down payment eliminates PMI | – Payment increase if rates rise |
| – 20% equity avoids PMI when refinancing | – Relevant for adjustable-rate mortgages |
| 💰 4. Secure a Lower Interest Rate | |
| – Larger down payment lowers rate, payment |
