Reasons To Use A Mortgage Calculator
A mortgage calculator can show you the monthly payment on a home loan using the purchase price, down payment and other common loan terms. This helps you understand how much you can afford to borrow to buy a home.
You can visualize how the costs to buy a home can change, just by adjusting certain factors in a mortgage calculator:
- Down payment: A larger down payment reduces the monthly payment and may help you avoid paying for private mortgage insurance, or PMI.
- Interest rate: You can see how changing the interest rate by a fraction of a percentage point affects the monthly payment and the total loan cost.
- Loan term: A longer loan term lowers the monthly payment, but a shorter term reduces the interest you pay.
How To Calculate Your Mortgage Payments
You can enter the home price, down payment amount, loan term in years, and interest rate to determine the monthly payment.
Entering your state allows the calculator to estimate property taxes. You also can enter amounts for property taxes, homeowners insurance premiums and HOA fees to better estimate the total monthly payment.
Mortgage Payment Formula
The formula used to calculate the monthly payment on a mortgage looks like this:
M = P x [r(1 + r)n] / [(1 + r)n – 1]
- M = Monthly mortgage payment. This is the amount you’ll pay each month.
- P = Principal loan amount. This is the amount you’re borrowing.
- r = Interest rate. Divide the annual interest rate by 12 to get the monthly interest rate.
- n = Number of payments. Multiply the years in your loan term by 12 to determine the number of monthly payments you’ll need to make.
This formula covers only the principal and interest part of your mortgage payment. Many homeowners also pay their property taxes, homeowners insurance premiums and HOA fees as part of their monthly payments. Your lender typically keeps this money in an escrow or impound account and pays those bills on your behalf.
Costs Included In Your Monthly Mortgage Payment
Let’s break down all the different costs that can make up your monthly mortgage payment:
- Principal: The amount borrowed.
- Interest: The cost of borrowing your loan.
- Property taxes: Taxes assessed by local authorities.
- Homeowners insurance: A policy that reimburses you for losses or damage to your property.
- HOA fees: If you’re buying a home in a building, complex or community with a homeowners association, you’ll pay HOA fees to cover shared expenses and services.
- Mortgage insurance: A policy that reimburses the lender for its losses if you can’t repay your mortgage. Conventional loans require PMI when the down payment is less than 20% of the purchase price.
Estimating How Much House You Can Afford
How much home you can afford depends on your income, savings and the terms of your loan.
One way to avoid buying a home you can’t afford is to follow the 28/36 rule. This rule states that you should spend no more than 28% of your gross monthly income on your mortgage payment and no more than 36% of your income on all debt payments.
How Lenders Determine How Much You Can Borrow
Before a lender approves your mortgage application, it will evaluate your ability to repay the loan.
Your debt-to-income ratio measures how much of your income goes toward paying debt and is a typical benchmark that lenders use to assess your risk as a borrower. You can calculate your DTI ratio by adding up your monthly debt payments, dividing that by your gross monthly income, and multiplying by 100 to get a percentage. You’ll typically need a DTI ratio of less than 50% to get a mortgage.
Lenders also consider your credit score. You need a credit score of at least 620 to get a conventional loan. Other loan types may require higher or lower credit scores.
How To Lower Your Monthly Mortgage Payment
You can play around with the mortgage calculator to see how changing the down payment, interest rate or loan amount affects the monthly payment. Here are some ways to reduce your monthly payment:
- Choose a longer term. Taking more time to pay off your mortgage reduces the monthly payment. Keep in mind this also means you’ll pay more total interest.
- Make a larger down payment. Paying more upfront reduces the amount you need to borrow and can get you a lower interest rate. A down payment of at least 20% on a conventional loan can save you from paying for PMI.
- Get a lower interest rate. You can get a lower interest rate by boosting your credit score and making a larger down payment. You’ll pay less each month and overall.
- Buy a less expensive house. Buying a home that costs less means you can borrow less.
Alternative Uses For A Mortgage Calculator
There’s even more you can do with a mortgage calculator, including:
- Calculate how to pay off a mortgage early. Paying off your mortgage early can save you a lot on interest – just beware of any prepayment penalties.
- Know when you can stop paying for PMI. Calculate how long it will take until you reach 20% equity and can stop paying for PMI.
- Understand your mortgage payment. See how much of each payment is chipping away at your principal and how much is going toward interest.
- Compare different mortgage types. You can see how various types of loans affect the monthly payment.
- Calculate your down payment. See how much you’d need to put down 20% of the purchase price on a home in your price range.
Frequently Asked Questions
Here are answers to common questions about using a mortgage calculator.
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