Why do you need a mortgage calculator?

A mortgage calculator helps to figure out exactly how much you need for your monthly mortgage payment. It estimates the amount needed for principal and interest. The taxes and insurance can be factored in as well. There are numerous online mortgage calculators that can be of help.

Enter home price, down payment amount, interest rate, loan term, and location. If you want the payment to include taxes and insurance go ahead and input the information. Some websites automatically estimate costs based on the state the property is located in. Press on the “Calculate” button and your monthly payment pops up on your screen in a few seconds. You can input different down payment amounts, loan terms, interest rates, and so on to check out your options. This calculator lets you know the amount you have to set aside per month in order to make payments in a timely manner. This way you won’ t fall behind when it comes to paying off the mortgage.

Mortgage Calculator

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%

Your estimated monthly payment

$3117.71
Monthly payment Amortization
$1,000
Principal & interest
+
Homeowner’s insurance
+
Property tax
+
HOA fees
Total monthly payment = $3117.71

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Understanding a mortgage

What is a down payment?

You need to pay a certain amount of money at closing. It is done to reduce the size of the loan, and is referred to as down payment. It basically represents your stake in the property. Ideally, a down payment of 20% is the standard amount. You will get the best interest rates and varied loan options. However, it isn’t mandatory to put down 20% to buy a house. There are several low-down-payment options available for home buyers. There are some techniques that let you purchase homes with less than 5% down payment too. In fact, there are loan programs that require no money down.

What is a loan term?

As is evident from the term, it is the period of time that is spent in paying off the loan. The preferred loan term is usually 30 years. Terms available depends on your financial situation and type of loan chosen.

Moreover, your budget plays a crucial role here. For instance, if you can afford to make higher monthly payments, you could clear off the loan quicker over a shorter term. The interest will be less, while you build equity faster. On the other hand, if you choose a longer term, the monthly payment will be lower as you pay off the loan over a longer period of time. But then again the interest is much more.

What is principal?

The principal is the loan amount that you borrowed and the interest is the additional money that you owe to the lender that accrues over time and is a percentage of your initial loan. Fixed-rate mortgages will have the same total principal and interest amount each month, but the actual numbers for each, change as you pay off the loan. This is known as amortization. You start by paying a higher percentage of interest than principal. Gradually, you will pay more and more principal and less interest.

What is an mortgage loan interest rate?

You pay a fee to the mortgage company to borrow the money – it is the interest. It is based on a percentage of the remaining loan amount. This “percentage” is the interest rate. There are numerous factors that determine interest rate, such as loan type, amount, down payment, credit history, etc. Market trends play an fundamental role here as well.

Types of mortgage rates

Fixed Rate Mortgages

For the entirety of the mortgage period, the interest rate will remain fixed. It ensures that you know the precise amount that is to be paid, which makes it simpler to manage personal finances and plan proactively. If the initial rate is low, it has a distinct advantage, because even if the rates shoot up later on, your mortgage rate is same till the full loan term is complete. The monthly payment for the entirety of the loan is fixed, so you don’t have to worry about fluctuations in interest rates. The demerit of this method is that the rate isn’t flexible so initial payments could be higher as compared to adjustable rate mortgages.

Adjustable Rate Mortgages

As opposed to a fixed rate mortgage, the interest rate and monthly payments keep changing and begin on the lower side. While this might seem advantageous, you have to consider the downside too. There is a risk of the payment and rate swinging either way at least once or twice a year since the adjustment depends upon a financial index. Depending upon the ups and downs of the interest rate for the duration of the mortgage, the principal and rate are changed accordingly. But the payments might drop if the interest rate goes down, even though it doesn’t allow advance planning as future monthly payments aren’t fixed.

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Your mortgage payment explained in detail

Monthly mortgage payment = Principal + Interest + Escrow Account Payment

Escrow account = Homeowners Insurance + Property Taxes + PMI (if applicable)

The lump sum that you have to pay to your mortgage lender each month is broken down into various different items. Most homebuyers have an escrow account – it is the account your lender uses to pay your property tax bill and homeowner’s insurance. It means the bill you get each month for your mortgage not only includes the principal amount and interest payment, but also property taxes, home insurance and, in some cases, private mortgage insurance.

What is homeowner’s insurance?

This is a policy you purchase from an insurance provider that covers you for natural disasters like fire, storms, etc. along with thefts and burglaries. For earthquakes and floods, you have to take a separate policy. This type of insurance can cost anywhere between few hundred dollars to thousands of dollars depending upon size and location of the property. When you borrow money to buy a home, your lender requires that you to have homeowners insurance. The reason is this type of insurance policy is a protection for the lender’s collateral, which in this case is your home, if there are fires or other events that cause damage.

How do property taxes work?

If you own property, you need to pay taxes levied by the county and district. That is why you should input your zip code, town, or city, while using property tax calculators (available online), which gives you the average effective tax rate where you reside. Property taxes vary widely from state to state and even county to county.

While it depends on your state, county and municipality, property taxes are usually calculated as a percentage of your home’s value and billed once a year. In some areas, your home is reassessed each year, while in others it can be as long as every five years. Property taxes are to compensate for services like road repairs and maintenance, school district budgets and county general services.

What is the formula for calculating a mortgage payment?

The mortgage payment calculation looks like this: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]

The variables are as follows:

M = monthly mortgage payment.

P = the principal amount.

i = your monthly interest rate. The lender most likely lists the interest rates as an annual figure, so you have to divide by 12 (for every month of the year). For instance, if the rate is 10%, then the monthly rate is 0.10/12 = 0.00833.

n = it is the number of payments till the loan lasts. If your mortgage period lasts for 30 years, n = 30 years x 12 months per year, or 360 payments.

What is PMI?

Private mortgage insurance, or PMI is an insurance policy that is required by lenders to secure a loan considered to be high risk. If your down payment is less than 20% you are required to pay PMI (and you can’t qualify for a VA loan). Most lenders insist on a 20% down payment due to equity. If you don’t have sufficient equity in the home, you will be considered a possible default liability. To put it in a nutshell, it means you are more of a risk to your lender if you don’t pay for enough of the home. PMI is calculated as a percentage of your original loan amount and can range from 0.3% to 1.5% depending on your down payment and credit score. When you reach at least 20% equity, you can put in a request to stop paying PMI.

What are HOA fees?

If you buy a condominium or a home that is part of a planned community, you have to pay homeowner’s association (HOA) fees. Typically, HOA fees are charged on a monthly or yearly basis. The fees include common expenses like community space upkeep of grass lawn, community pool or other shared amenities, along with building maintenance. When you are scouting homes, your real estate agent will disclose HOA fees right away, so you know exactly how much the current owners pay. HOA fees are an additional ongoing fee to contend with, they don’t cover property taxes or homeowner’s insurance in most cases.

How to reduce your monthly mortgage payment?

Select a longer loan term, which is the number of years it will take to pay off the loan. If you opt for a longer term, the payment is lower but you have to pay more interest over the years.

Opt for a less expensive property, which means a smaller loan, and hence lower monthly mortgage payments.

Steer clear of PMI by paying a down payment of 20% or more. Thus, you don’t have to bear the hassles of shelling out PMI, while maintaining at least 20% equity in the home.

Get a lower interest rate. Here too, paying a larger down payment is beneficial as it helps to bring down your interest rate, which means a lower monthly mortgage payment. Moreover, you are always welcome to shop around with other lenders to find a more favorable interest rate to keep monthly mortgage payments as low as possible.

Exercise caution as monthly payments can go up for the following reason:

Homeowners’ insurance premiums or property taxes go up, which directly affect mortgage payments.

You get late when it comes to paying, and consequently incur a late fee from your mortgage loan servicer.

You have an adjustable rate mortgage, and the rate goes up at the adjustment period.

To sum up, here is what your mortgage payment consists of
Principal
The amount borrowed from the lender.
Interest

The amount the lender charges you to lend the money. Rates of interest are expressed as an annual percentage.

Property taxes

Local authorities levy an annual tax on the property. If you have an escrow account, you need to pay about 1/12th of your annual tax bill with each monthly mortgage payment.

Homeowner’s insurance

This insurance policy is for covering damages, losses, and financial needs from fires, storms, thefts, trees falling on your home and other hazards. Moreover, if you live in a flood zone, place that is earthquake prone or an area frequented by hurricanes, you might need additional insurance policies. Just like property taxes, you have to pay 1/12th of your annual insurance premium each month. Your lender or servicer pays the premium when it is due.

Mortgage insurance

If your down payment is less than 20% of the property’s purchase price, you have to pay mortgage insurance. This amount is added to your monthly payment.

Without proper planning, paying off the mortgage for your home can become tedious and extremely time-consuming. If required, seek professional advice about the best type of mortgage rate, and how you can buy a decent home, while keeping mortgage monthly payments reasonably low.

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