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How to Calculate Your Mortgage
When planning for a mortgage loan, you’ll have to take into account the loan principal, house price, down payment, loan term and interest rate — all of which a mortgage calculator can help with. A mortgage loan calculator calculates your estimated monthly mortgage payments so you can determine how to safely budget for your mortgage loan, as it’s likely to be your biggest cost-of-living expense. In other words, don’t skip the important step of using a mortgage purchase calculator while planning your home purchase.
How much house can I afford?
To help determine how much house you can afford, let’s examine a few budgetary examples. If you want to pay no more than $1,500 a month and spend no more than $400,000 on a home, one way to go about it is to put down $71,278 (20%) on a $356,000 home with a 30-year loan with a 3.07% interest rate. This $1,500 monthly payment would include the principal and interest, homeowners insurance and property tax.
If you’re looking to be a little tighter with money and don’t want to pay more than $1,000 in monthly payments, you’re looking at a 30-year loan with a maximum purchase amount of a little over $227,000. You’ll need to put down $45,496 as a 20% down payment.
You will also want to use the 28/36 rule as a guide when considering a new home. This means you’ll want your household expenses to stay under 28% of your gross monthly income. Your debt, on the other hand, should not eclipse 36% — this is known as debt-to-income ratio. You should be able to comfortably afford that new home you’ve been eyeing, just as long as you budget your expenses and debt so that it doesn’t exceed 28/36.
Understanding your mortgage payment
There are lots of moving parts that go into your mortgage payments. One important factor in that equation is the type of loan you go with. Mortgage options include:
- Conventional mortgages: These types of loans are not insured by the federal government and come in two forms: conforming loans and non-conforming loans. Conforming loan limits fall within Fannie Mae and Freddie Mac caps, whereas non-conforming loans don’t have to be set within those limits. In 2020, the maximum conforming loan limit for single-family homes is $510,400 for most areas of the U.S.
- Jumbo mortgages: Jumbo mortgages are non-conforming conventional mortgages. These types of loans have a much higher maximum loan limit than the conventional loans and are best for homes in high-cost areas. These loans usually require a lot of paperwork and documentation to qualify.
- Government-insured mortgages: These types of mortgages include FHA loans, VA loans and USDA loans. All FHA loans come with a special type of insurance that’s required of every buyer, as these types of loans are usually for buyers who don’t have a lot of savings or have a less-than-ideal credit score. USDA loans are typically limited to buyers who are in the moderate- to low-income bracket and are buying in rural areas. Some USDA loans do not require a down payment. However, you must be in a USDA-approved area to qualify. VA loans have low interest rates and flexible loan terms for former and current U.S. military members and do not require a down payment.
- Fixed-rate mortgages: Fixed-rate mortgages keep your monthly mortgage payments at the same rate through the life of the loan. These types of loans usually come in 15, 20 or 30-year terms.
- Adjustable-rate mortgages: When it comes to adjustable-rate mortgages, expect your monthly rates to fluctuate. Protect yourself financially by finding an adjustable-rate mortgage that offers a cap on how much your monthly mortgage rate can increase.
If you want to put your mortgage loan calculator on paper, you’ll need to use an equation. Business Insider suggests using this equation to determine your mortgage payment:
M = P[ i(1 + i)^n ] / [ (1 + i)^n – 1]
M = mortgage payment
P = principal loan amount
i = monthly interest rate. A lender will provide your annual interest rate and you’ll divide that number by 12 (the number of months in a year). For example, if your annual interest rate is 4%, your monthly interest rate would be 0.003333 (0.04/12=0.003333).
n = number of months needed to pay off loan. You’ll have to multiply the number of years on your loan by 12 (the number of months in a year) to get this answer. For example, if you have a 30-year loan, you’ll have 360 payments (30×12=360).
What is principal and interest?
The principal is the amount of money that you borrowed and are obligated to pay back to the lender. Interest is what that lender charges you for giving you the loan. Your interest rate depends on a variety of factors, including your credit score, the loan type, the loan terms and your down payment. When you make monthly mortgage payments, the principal and interest take up the largest parts of that payment. Things like PMI or other fees make up the rest.
What is homeowners insurance?
Homeowners insurance is a type of property insurance that protects and insures your home and belongings from damage. If you don’t get homeowners insurance, you’ll have to cover damages to your home out-of-pocket. That’s not usually an option, though — all lenders require that you carry homeowners insurance on your home.
There are eight types of homeowners insurance, including:
- HO-1: This is the most basic of homeowners insurance, only covering your house structure.
- HO-2: HO-2 will cover your home and your belongings but not liability. Neither HO-1 nor 2 are ideal plans for homeowners.
- HO-3: This is the most common type of homeowners insurance. Under HO-3, your home, property, liability, additional living expenses and medical bills will be covered. Most mortgage lenders will require you to have at least an HO-3 level homeowners insurance.
- HO-4: HO-4 is standard renters insurance. It will cover your personal property and offer liability coverage. Some policies will even cover additional expenses, such as a hotel bill, in situations where you have to move out of your rental home temporarily.
- HO-5: The HO-5 is one of the best options for homeowners insurance. It will cover your home, belongings, liability, additional living expenses, medical payments to others and even jewelry.
- HO-6: If you own a condo, you’ll need to get HO-6 coverage. This plan covers your belongings, liability and loss of use.
- HO-7: When it comes to mobile homes, you’ll have to get yourself an HO-7 policy that will cover your belongings, liability, your dwelling, medical payments and additional living expenses.
- HO-8: This type of homeowners insurance will protect your home’s structure, liability, belongings and medical bills.
How do property taxes work?
Property taxes are set and collected by local government entities. Your property tax is based on the determined value of your property — decided by your community property appraiser’s office — multiplied by your local property tax rate. Put simply, value of property x tax rate = property tax. Property taxes are beneficial to communities because they go toward assets like infrastructure, parks and schools. Property taxes are usually paid one of two ways:
- On an annual or 6-month basis by check or online when you receive your bill from your local tax authority, or
- By monthly payments to an escrow account through your mortgage servicer when you pay your mortgage bill
What is PMI?
If you’re unable to put a 20% down payment on a house, lenders will generally require you to take out private mortgage insurance (PMI) as a condition of your loan approval. PMI is a type of mortgage insurance that protects the lender. Some government-backed loans, like FHA loans, also require extra mortgage insurance.
There are five types of PMIs, including:
- Borrower-paid mortgage insurance (BPMI): A BPMI is the most common type of PMI. It’s an extra monthly fee that you’ll have to pay with your mortgage payments. Once your mortgage loan is paid, you’ll pay your BPMI on a monthly basis until you reach 22% equity on your home.
- Lender-paid mortgage insurance (LPMI): With this type of PMI, you pay via a slightly higher interest rate to your mortgage lender and they pay the mortgage insurance premium. Because your LPMI is built into your mortgage loan, you won’t be able to cancel your LPMI once your equity reaches 78%.
- Single-premium mortgage insurance (SPMI): With SPMI, you’ll have to pay a lump sum at closing or it will be factored into the mortgage. Unfortunately, the downside of an SPMI is that if you sell your home or refinance, you won’t be able to get a refund.
- Split-premium mortgage insurance: A hybrid form of SMPI and BPMI, split-premium mortgage insurance is the least common PMI. You’ll have to pay for part of the PMI at closing and the rest via monthly payments. Once your PMI is canceled, you can get a partial refund.
- Federal home loan mortgage protection (MIP): MIP requires borrowers to make an upfront payment and pay for additional monthly premiums. This type of mortgage insurance is limited to loans underwritten by the Federal Housing Administration (FHA) and, in most cases, it can only be removed by refinancing your home.
How to lower your monthly payment
When money gets tight, it’s important to remember that your monthly mortgage payments don’t have to be static. There are many ways to adjust and lower your monthly payments, including:
- Finding a low refinance rate
- Choosing a longer loan term
- Putting down a larger down payment
- Applying for mortgage forbearance
- Purchasing a less expensive home
- Getting rid of your mortgage insurance
- Looking into programs such as FHA/VA/USDA for cheaper mortgage loans and refinances rates. Some programs don’t require down payments for your home.