Mortgage Calculator: A Tool for Figuring Out How Much You’ll Pay
Are you wondering how much it'll cost to buy your dream home? If so, a mortgage
calculator is the best way to estimate what your monthly mortgage payment will
be. With our calculator, you can input a different price, down payment amount,
term length, and interest rate. Once you click or tap "Calculate",
you'll see the amount you can expect to pay each month for your mortgage.
You'll also see a breakdown of your monthly payment. Using our mortgage calculator,
you'll see how much of your payment will go to:
- Principal
- Interest
- Property Taxes
- Homeowners' Insurance
- HOA Fees (if applicable)
- Private Mortgage Insurance (PMI)
- PITI (this is a combination of four of the factors above)
Using this information, you can figure out if the home you want to buy will fit within
your budget.
However, although it's nice to have the mortgage calculator find all this information
for you, it's also worth knowing what all these numbers mean. You'll want to
know how they factor into your home's affordability and how to calculate this manually
(we'll show you how to ballpark what a mortgage payment will be even if you
don't have this calculator handy!).
Let's first start with the basics.
What Goes Into Your Monthly Payment?
As noted above, the job of a mortgage calculator is to let you see how much you
can expect to pay for your mortgage. However, what goes into that monthly
payment is often somewhat of a mystery - especially for first-time homebuyers.
At a bare minimum, the monthly payments you make must pay off the mortgage balance
at the end of the pre-agreed term. So, if you borrow $100,000 for 15 years from
the bank, you will have 180 payments (12 months per year x 15 years).
That means your monthly payment will be at least $100,000 / 180 payments = $555.55
per month.
However, if you're shopping for a mortgage, you know that your monthly payment isn't
just the amount you borrowed. It also includes interest. Interest is
effectively a fee that the bank charges while you have the money they lent you
in your possession.
So, if your interest rate were 4%, your monthly payment would be $739.69.
On average, you'll pay the bank $184.14 per month in interest. But, at the
beginning of the loan, you have $100,000 of the bank's money. Towards the end
of it, you might only have $1,000 of it left to pay off.
4% of $100,000 and 4% of $1,000 are vastly different. Therefore, you'll pay more
of your monthly payment towards interest in the beginning. Anything that
doesn't go towards interest will pay off the principal (another term for the
remaining balance on your loan).
All mortgages have these two components. Some portion of the monthly payment will
go towards interest. Another part will pay down the remaining balance on your
mortgage (also known as the principal).
What Else Goes Into the Monthly Payment?
In the United States, most mortgages are not just interest and principal. To make
things easier for homeowners and reduce the banks' risk, most mortgages handle
property taxes and homeowners insurance. In other words, while the mortgage is
active for the property, the homeowner won't pay the property taxes and
insurance - the bank will do so.
Once the purchase closes and the loan is active, the bank will set up a separate
account called an escrow account. That account will act basically like a
no-interest savings account. The bank will then estimate how much your yearly
property tax and insurance costs will be and divide that by the 12 payments
you'll make towards your mortgage each year.
The bank will then pay these bills on your behalf, regardless of if you have enough
money in escrow or not. If you don't have enough, the bank will reassess and up
the amount you pay into this account each year. Similarly, if you don't have
enough, the bank will decrease it.
The best way to illustrate how this all works is to provide an example. Let's
suppose Bob buys a home in Los Angeles. He indicates that he wants to pay for
the property taxes and insurance as part of the mortgage during the loan
process. The purchase closes, and the home is Bob's.
Since the home is worth $500,000, the bank estimates that property taxes will be
about $7,200. And, they know that the insurance costs $1,200 per year. So, when
the purchase goes through, they open the escrow account and tack $700 to each
monthly payment ($600 per month for property taxes and $100 per month for
insurance). Instead of your mortgage costing $1,500 per month for principal and
interest, it's now $2,200, with $700 going to this escrow account.
Two months in, let's say there's a property tax payment of $3,600 (LA county
collects property taxes through two charges annually). Even though there's only
$1,400 in the escrow account at the time, the bank will still pay the full
$3,600. The escrow account will have a -$2,200 balance.
At the end of the year, let's say the account is $600 in the negative. If that's
the case, the bank will increase the escrow amount by $50 per month. Instead of
having a monthly payment of $2,200, it will now be $2,250.
What Is the PITI Line in a Mortgage Calculator?
This total monthly payment, including property taxes and insurance, is the PITI line
on a mortgage calculator. PITI stands for "Principal, Interest, Taxes,
Insurance" and would be the $2,200 amount mentioned above.
If you're the type of person that tends to prefer to pay things as they come due,
you might be wondering why someone would want to bundle their taxes and
insurance as part of their monthly payment. Why not just pay these bills as
they come due?
There are two primary reasons for electing to roll it in as part of your broader
mortgage payment.
Budgeting
The primary reason why people pay their property taxes and insurance through their
mortgage is that it makes it easier to budget for these expenditures. With more
expensive homes (or in very high property tax jurisdictions like New Jersey),
property taxes are not cheap!
In New Jersey, the average property tax rate is 2.49% of your home's value each
year. That means that if you have a $500,000 property in New Jersey, you can
expect to pay about $12,500 annually in property taxes. In many places in New
Jersey, these are due quarterly, so that $12,500 would be four payments of
$3,125.
With such large sums of money due all at once (and such high potential ramifications
if the money isn't available), many people find it difficult to budget for
these payments. You might forget that it's coming due or even have a
reassessment that makes your bill higher than you thought it was.
By combining these payments as part of your mortgage, you break them up into more
manageable pieces. Instead of paying $2,000 a month for your mortgage and having
$3,125 due quarterly, you can pay $3,000 a month instead. It's much more
straightforward and intuitive!
Assurance
The other less-obvious reason why people like bundling these two together (and why
you should probably include them on our mortgage calculator) is the assurance
that these bills will get paid. No matter what is in your escrow, the bank will
pay these bills. There's no danger that you'll forget or that you'll have a
severe health issue, for example, that results in a missed payment.
By bundling your property taxes and homeowners insurance, you can have peace of
mind that you'll never miss these payments!
Is PITI What I Pay Each Month?
Yes and no. If you have no mortgage insurance, the amount on the PITI line in our
mortgage calculator is what you can expect to remit to the bank each month. It
encompasses the four major mortgage-related expenditures for homeownership:
principal, interest, taxes, and homeowners insurance.
However, if you put less than 20% down or have an FHA loan, you will also have something
called "PMI" or "Private Mortgage Insurance". This amount
is a fee you will pay to insure the loan for the bank. This insurance doesn't
protect you! Instead, it protects the bank from losing money if you can no
longer pay the loan and they have to foreclose. If you have PMI, it also gets
added to the monthly payment.
Please note that PMI is usually temporary. Most loans will let you stop paying this
amount once you have 20% equity in the property.
So, your monthly mortgage payment is PITI + PMI (if applicable).
You will also see a line for "HOA Fees." If you are buying a condo or
home in an association, you'll likely have homeowners' association or condo
owners' association dues. These fees pay for common areas and amenities. For
example, if you're looking at a community with tennis courts and a pool, those
shared amenities come from the dues that members pay.
Most associations have dues that they request monthly. However, some associations
have yearly dues. The associations with yearly dues tend to be more nominal,
and the dues often cover very little. The $300 a year that people pay might
merely pay for the association board and a few minor repairs around the
community.
What is important to remember, though, within the context of a mortgage calculator,
is that you will not pay your HOA fees through escrow most of the time. It is
sometimes possible, but normally escrow only includes your taxes and insurance.
Therefore, if you're buying a condo or a home with an HOA, you'll typically have two
monthly payments: one to the bank for the mortgage and another for the dues.
How Much Can I Afford?
Now that you know what your mortgage payment includes each month, the next logical
question that most prospective homeowners have is: how much can I afford?
The answer to how high of a mortgage payment you can afford has two parts. The
first is a personal preference. Some people are more comfortable with a higher
mortgage payment than others. The second is a limitation that most lenders and
mortgages have.
For the first part, you should be realistic about how much you feel comfortable
putting toward a mortgage each month. Most financial advisors say that putting
more than about 30% of your gross pay per month is a bad idea. Of course, this
statement is quite income-dependent. If you are making $10,000 a month, perhaps
spending $4,000 instead of $3,000 isn't that big of a deal. But, if you are
earning $1,000 a month, then there's a good chance that the difference between
$300 and $400 a month is quite significant!
A better approach is often to look at your historical spending and be honest
about your financial picture. When you get a number back out of the mortgage
calculator, go back through your history and assume you had been paying that
instead of your current rent or mortgage. What would your finances look like
today? Would you be even more in debt? Or would you have just saved not quite
as much?
If the PITI and homeowners association amounts you get from your mortgage
calculator seem reasonable, the following limitation has more to do with the
banks than your comfort level!
Most conforming conventional loans have a maximum debt-to-income limit of 50%.
Other mortgages, like FHA loans, have a debt-to-income limit of 43%.
That includes your mortgage payment!
So, if you earn $5,000 per month, your mortgage payment plus your other debts
cannot exceed $2,500 (and, in many cases, it cannot exceed about $2,150).
To calculate your other debts, you need to add up all the minimum monthly payments
you have. To illustrate this with an example, let's assume that Jill wants a
mortgage. She has a car payment of $500 and a credit card with a minimum amount
of $150 per month (at least, that's what it was on the last statement). Jill
makes $5,000 a month gross.
Therefore, her current debt-to-income ratio is $500 + $150 = $650 / $5,000 = 13%. If she
wants an FHA loan with a debt-to-income ratio limit of 43%, that means she can
have $5,000 x 43% = $2,150 - $650 current debts = $1,500 as a maximum monthly
mortgage payment. That will include her property taxes, homeowners' insurance,
and PMI!
Therefore, you can figure out the maximum you can afford by figuring out your
debt-to-income ratio and the loan type you want!
How To Calculate a Mortgage Payment?
Although a mortgage calculator is a simple, intuitive way to calculate your monthly
mortgage payment, you should know that it is also relatively straightforward to
do with a calculator!
The mortgage payment equation is this:
Let m = monthly payment.
Let p = principal amount.
Then, let i = monthly interest rate (e.g., for a 3.6% rate, i = 0.036 / 12 = 0.003).
Finally, let n = the total number of payments (e.g., for a 15-year loan, n = 15 * 12 = 180).
m = p[i(i+1)^n]/[(i+1)^n-1]
To illustrate a simple example, let's say that you have a principal amount of
$100,000, an interest rate of 3.6%, and the mortgage will go for 15 years (180
payments).
The formula would be:
m = $100,000[0.003(0.003+1)^180]/[(0.003+1)^180-1]
m = $100,000[0.00514386]/[0.7146]
Then, m = 514.386 / 0.7146
Finally, m = $719.80
If you try those parameters in our mortgage calculator, you'll get this monthly
principal and interest!
This calculation reveals a few interesting things to keep in mind:
- As you likely already know, the higher the interest rate and the higher the principal,
the more you will pay per month.
- The shorter the term, the more you will pay per month. The reason for that is that
the ratio between the numerator and denominator gets smaller as the variable n
grows. In the example above, the numerator is 514, and the denominator is
0.7146. If n = 360, the numerator is 881.97, but the denominator is now a
whopping 1.93!
- You can guesstimate payments by doing the calculation for $1,000 and multiplying accordingly. The monthly
payment for $1,000 at a 3.6% rate for 15 years is $7.20. That means $100k is
about $720, $200k is $1,440, and $1 million is about $7,200 per month. If you
know what each $1,000 increment will cost, you can scale your purchase price to
fit within your budget accordingly.
What Are Some Reasons To Use a Mortgage Calculator?
If you're looking at buying a new home, a mortgage calculator can help you in a
few ways (aside from the obvious telling you how much you'll probably pay per
month in housing!).
First, a mortgage calculator helps you explore what term lengths work best for your
budget and lifestyle. You'll always pay less interest the shorter your mortgage
is. Therefore, you can often explore two different scenarios: getting a bigger
home with a longer 30-year mortgage or buying a smaller home with a shorter 15-year
mortgage? Remember that 15-year mortgages often have the added benefit of
having a lower interest rate.
Depending on how wide the discrepancy is for rates, there's often a chance that you'll
wind up not paying that much more for a 15-year loan that will save you
thousands of dollars in interest! Consider that a $100,000 loan for 4.5% for 30
years is just $208 cheaper per month than the same principal amount at 3.5% for
15 years. Yet, with the 15-year mortgage, you'll save $54,000 in interest over
the life of the loan!
With a mortgage calculator, you can play around with these types of scenarios before
you hit the apply button to start the process of getting a mortgage with the
bank!
Second, a mortgage calculator can help you see if an ARM loan is right for you. ARM
loans typically start with an introductory rate that will change with time. In
a few years, that 4% that you're paying now could be 6%, depending on how the
markets go. With this type of calculator, you can see if you can afford the
mortgage if the rate went up.
To be safe, consider doubling the rate. If your intro rate is 2.5%, see what it
would be at 5%. If you think you can still afford it, taking advantage of that
introductory rate might be worth it for you!
Finally, a mortgage calculator gives you a reality check. When you see the amount you'll
pay (remember, that's PITI and PMI, if applicable), you can ask yourself: can I
afford this? Of course, be honest with yourself. If you think you can make it
work, that will give you added confidence that making this move is the right
decision!
Use Our Mortgage Calculator
Our mortgage calculator is easy-to-use and has fields for all the information
relevant to your monthly mortgage payment. Using our mortgage calculator, you
can enter the home price, down payment, interest rate, loan term, start date,
and all the other necessary information (e.g., taxes and HOA). Once you put
that information in on the left, use the "Calculate" button to see
what you will pay.
You'll get the monthly principal and interest, as well as your total monthly payment.
You'll also see the amortization schedule and a breakdown of what your monthly
payment will include. This amortization schedule shows which part of your
payment will go to which bucket over time (interest, principal, and everything
else).
One of this particular mortgage calculator's best features is that you will see
ranges for the principal and interest. Additionally, you'll see how much you
can expect to pay for each category annually and how much you'll pay throughout
the loan.
There's no other mortgage calculator with the same level of detail, ease-of-use, and
speed that our calculator has. If you're considering shopping for a home, try
our mortgage calculator today. It'll give you a better idea of what you can afford
before you start shopping or applying to banks!
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