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How to Understand Your Mortgage Calculator
Many different variables go into determining your monthly mortgage payments and the total interest charged over the life of your home loan. Here’s a short guide to understanding your mortgage calculator estimated results and your quotes from lenders.
Know Where Your Money is Going
Mortgage payments and fees are more complex than meets the eye, so it helps to break them down into their individual parts using a mortgage calculator, so you can estimate what you expect to pay.
1. Upfront Payments
First, there’s the amount you pay upfront, comprising down payment and closing costs. Minimum down payment is often 20% or more of the loan amount, unless you’re taking out a government-backed loan with down payment of 0-10%. Closing costs typically reach 2-5% of the loan amount and comprise things like origination fees, appraisal, title fees, and attorney fees.
2. Monthly Payments
The second part is your monthly payments. You make monthly payments until you pay off all your principal. Depending on your loan term, you might make monthly payments for 10 years, 15 years, or even 30 years. Monthly payments are composed of principal, interest (also expressed as APR—rate, plus certain other fees and charges, minus discounts for upfront payments), plus third-party charges required by the lender.
Working out how much you’ll pay each month is tricky. This mortgage loan calculator helps you determine your monthly payments with just a few clicks. Here's a list of the various components of your total monthly payments:
Principal
Principal is the amount owed on the loan. After each monthly payment, your principal decreases, until it eventually reaches zero and you have paid off the loan.
Range: depends on house price
Interest
Interest rate is the cost of borrowing the principal loan amount, expressed as an annual percentage. When other monthly fees are added to the interest rate, this is expressed as APR, or annual percentage rate.
Range: average mortgage rates in 2019 are around 3.5%-4.0%, but rates can be lower or higher depending on the lender, loan amount, and your credit score.
Property Tax
All homeowners must pay local property tax. Lenders usually collect property tax alongside mortgage payments.
Range: from 0-4% of the home value annually, depending on local government rules.
Private Mortgage Insurance (PMI)
If you make a down payment of less than 20%, your lender will probably require you to pay PMI. You may be able to request a stop to PMI once you reach 20% equity.
Range: from 0.5-1.0% of the home value annually.
Homeowners Insurance
Most lenders require homeowners to purchase enough insurance to cover the cost of their mortgage.
Range: average monthly premiums range from $50 to $350, depending on the state.
Homeowners Association Fee
Fee paid by owners of certain types of residential properties, such as condos or single-family homes in a gated complex.
Range: typically ranges from $100 to $300 per month.
Calculate Your Mortgage Options
Your monthly payments are determined by 3 components in this mortgage calculator:
The loan amount (principal)
Interest rate and fees
Loan term
This calculator shows you how each change affects your monthly payments.
The effect of loan amount and interest rate on monthly payments is straightforward. The higher your loan amount, the higher your monthly payments and the higher the cost of your mortgage. Likewise, the higher your interest rate, the higher your monthly payments and cost of your mortgage.
As for loan term, this is trickier: the longer the loan, the higher the total interest paid, but the lower the monthly payments; the shorter the loan, the lower the total interest paid but the higher the monthly payments.
For example, let’s say you purchase a home for $300,000, pay down 20%, and owe the lender $240,000 at a fixed 4.2% interest rate.
With a 30-year term, you would pay $1,174 each month and $182,510 in total interest payments over the life of the loan.
With a 15-year term, you would make a higher monthly payment of $1,799 but you would pay only $83,892 in interest—a significant saving in the scheme of things.
Find the Break-Even Point
Refinancing your mortgage is a different calculation because it involves new closing costs. Convention says that for a refinance to be worthwhile, your new rate should be 0.5% to 1% lower than your old one. However, your “break-even point” really depends on a number of factors, such a:
Your old interest rate
Your new rate
Closing costs
How long you plan to stay in your home
The best way to calculate your break-even point for refinancing your mortgage is to compare cost savings vs closing costs. If your new loan saves you $200 per month and you have $4,800 in closing costs, it will take you 24 months (2 years) to start saving money each month.
Choose a Loan Term and Program
As mentioned, your calculated monthly payments depend on your loan amount, interest rate, and loan term. Therefore, it’s important to compare the following options before taking out a mortgage:
Fixed rate vs adjustable rate:
A fixed rate offers the certainty of having the same interest rate for the entire loan term. An adjustable rate mortgage, or ARM, offers a lower initial rate and higher risk-reward. With an ARM, you might pay less overall interest or you might pay more overall interest—it all depends where rates go in the future.
15-year term vs 30-year term:
Loan term has a significant impact on your monthly payments. If you can afford it, you should go for a shorter loan term. That’s because shorter loan terms have higher monthly payments but lower overall interest paid. In other words, shorter terms are cheaper.
Conventional vs government-backed loans:
Conventional loans usually have a 20% down payment, although some lenders offer what are known as “low down payment mortgages.” Government-backed loans include FHA loans, VA loans, and USDA loans, which offer eligible borrowers the option of buying a home with a low down payment. For example, FHA loans are designed to get people with 500-620 credit into a home with a 3.5% to 10% down payment. With a VA loan, active service people and veterans can purchase without any down payment.
How to Choose a Mortgage Lender Based on Your Calculation
In addition to rates, fees, and terms, there are several other things to look for when comparing mortgage lenders.
Minimum credit score: Most lenders require at least 620 credit for conventional mortgages and 500 for FHA loans, but some are stricter. Before taking a mortgage, find out your credit score (from AnnualCreditReport.com, or from agencies Experian, Equifax, and TransUnion) and look for a lender that is likely to accept you.
Minimum down payment: If you qualify for an FHA or VA loan, you can buy with low or no down payment. If you’re in the market for a conventional loan, some lenders offer low down payments or no-closing cost loans to help you get in the market. Of course, if you can afford to pay down 20% or more, you should, because it will save you on total interest payments.
Pre-approval process: Pre-approval means the lender has approved you for a specific loan amount (usually with an expiration date, such as 90 days). Some sellers won’t sell without seeing your pre-approval document, so it’s a good idea to find out how long your lender might take to provide this.
Closing times: Long delays can hurt your ability to purchase and add to your overall costs. Therefore, it’s important to know you can rely on your lender to process your mortgage application quickly. According to Ellie Mae, average closing times are around 45 days for a purchase and 34 days for a refinance.
Customer service: A mortgage is a big deal and you should expect excellent customer service. Before choosing a lender, read online reviews and customer feedback to find out which lenders treat their customers best.
Be Confident that You Are Choosing the Right Home Loan
Understanding the basics of how the mortgage calculator works can help ensure that you calculate mortgage payments correctly, in accordance with your financial situation and add in any additional expenses you may have. There is no ideal mortgage loan or lender that fits everyone across the board, so it's important that you choose the loan type, APR, repayment terms and lender that work best for you. Buying a home is likely the biggest purchase you'll ever make, and refinancing remains a large financial commitment, so it's important that you have the knowledge and tools needed to make the best decision on a mortgage loan.