There’s nothing more exciting than buying a home. It’s also one of the most important (and likely most expensive) financial decisions that you’ll make in your lifetime. Just as it’s important to find a home that meets all your wants and needs, it’s just as important to choose the right mortgage.
When buying a home, you’ll need to figure out how much you can afford. This helps to narrow down your search for the perfect home while also giving you the numbers you need upfront. This way there aren’t any big surprises when it’s time for closing.
Here’s what you need to know about mortgage calculators, including how they work and how you can use them for your benefit.
How to Calculate Mortgage Payments
Whether you’re just starting to look at homes or if you’re still trying to figure out how much home you can afford, it helps to know how to calculate mortgage payments. Before you can get an idea of what your monthly payments will look like, you’ll need some numbers.
Principal Mortgage Amount
The total amount of money that you will need to take out is known as the principal mortgage amount. For example, if you’re buying a $400,000 home and have the cash to put down a 20% down payment, your principal mortgage amount is $320,000.
With a fixed-rate mortgage, your monthly payment will be the same. As you make more payments, more money will go towards principal as less goes towards interest.
Monthly Interest Rate
The interest rate is the fee that a bank charges you to borrow money to pay for your home. Buyers with a high credit score, large down payment, and low debt-to-income ratio are likely to receive a lower interest rate.
Homebuyers with a low credit score, a minimal down payment, and a high debt-to-income ratio are riskier, so the lender will charge a higher interest rate.
The national average for a 30-year fixed mortgage rate is 3.04%. To calculate your monthly interest rate, divide that number by 12. In this scenario, the rate would be 0.253%.
Additional Read: How To Lower Your Mortgage Interest Rate
Number of Payments
The most common loan terms are 30 years and 15 years. To calculate the number of monthly payments you’ll make during the loan term, multiply the number of years by 12. This means that you’ll make 360 payments for a 30-year mortgage and 180 payments for a 15-year mortgage.
Private Mortgage Insurance (PMI)
If you put less than 20% down on the purchase of your home with a conventional mortgage, your lender will likely charge PMI. This premium is added to your monthly payments and can range anywhere from 0.2% to 2% of your mortgage principal.
Some lenders choose to waive PMI once the home has 20% equity.
Property Taxes
Your monthly mortgage payment is likely to include your property taxes. These are collected by your lender each month and are put into an escrow account. Property taxes are then paid on your behalf.
How much you’ll pay in property taxes depends on the value of the home and local tax rates. Check your local government’s website for more details.
Homeowners Insurance Coverage
One final number that you’ll need to calculate your monthly mortgage payment is the cost of homeowners insurance. The amount you’ll pay depends on the type of plan you choose as well as the insurance provider.
Mortgage Payment Calculation
To calculate your monthly mortgage payment excluding taxes and insurance, use this equation:
M = P[ i(1 + i)^n ] / [ (1 + i)^n – 1]
P = principal loan amount
i = monthly interest rate
n = number of monthly payments (ie. 360 or 180)
After calculating your monthly mortgage payment (M), you can add in monthly property tax and homeowners insurance costs. These costs are determined by external factors and play no role in how much you’re approved to borrow.
How Can a Mortgage Calculator Help Me?
A mortgage loan calculator offers all sorts of benefits for prospective home buyers. Though it’s all too easy to jump into searching for a home, it’s best to first crunch the numbers to figure out how much you can afford.
With a mortgage loan calculator, you can easily determine the estimated monthly payments for any given loan amount. By using a home loan calculator, you’ll get an in-depth look at your monthly payments. You can also use this tool to compare multiple interest rates to see how they impact your payment.
Using a home loan calculator offers many advantages, including:
- Helps to plan expenses
- Identifying the amount of interest you’ll pay
- Dynamic and easy to use
Most importantly, these calculators are free. Whether you’re on your laptop or phone, you can plug numbers into a mortgage calculator to get the numbers you need.
The Workings of a Mortgage Calculator
All mortgage calculators use a variation of the same equation, which is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
M = the monthly mortgage payment
P = principal loan amount
r = monthly interest rate. Your lender will provide you an annual rate (ie. 3%). To get your monthly interest rate, that number needs to be divided by 12.
n = number of monthly payments. Your loan is set in years versus months. To figure out the total monthly payments, multiple the loan term in years (ie. 30 or 15) by 12. A 30-year fixed mortgage has 360 payments while a 15-year has 180.
By providing this information, the calculator will give you an estimated monthly payment in a matter of minutes. But be aware that this number isn’t finalized. It’s merely a rough estimate of what your mortgage payments will look like.
The Drawbacks of Using a Mortgage Calculator
It’s important to remember that a mortgage calculator is only as good as the information you provide. If you put in an incorrect number, the monthly mortgage payment will be skewed. Before pressing enter, be sure that your numbers are correct.
Be aware that most mortgage calculators don’t include factors such as insurance, property tax, closing costs, fees, and other monthly costs that will affect your monthly payment.
The more information that the mortgage calculator provides, the more realistic the numbers will be.
The Advantages of Using a Mortgage Calculator
Unless you really enjoy math, calculating the estimated monthly payment for your mortgage loan can be cumbersome and confusing. While you could reach out to a potential lender or an accountant to crunch the numbers for you, there’s also the option of using a mortgage calculator.
These online calculators are designed to perform complex calculations in a matter of seconds. As long as the numbers you input are correct, your results will be accurate.
By using a mortgage calculator ahead of time, you can get a good idea of how much you’ll be expected to pay each month for your home. With these numbers you can:
- Set a price range when house shopping
- Ensure the amount is one you can afford
- Start planning your finances and budgeting early on
- Choose the right loan
Knowing how much home you can afford is one of the first steps in buying a home. You don’t want to risk falling in love with a house that you can’t afford. Or worse, taking out a mortgage and defaulting on the payments because you can’t pay them.
Contact the Mortgage Expects at A and N Mortgage
We encourage potential homebuyers to use our mortgage calculator to get a rough estimate of what their monthly payment may be. Unsure if a 15-year or 30-year mortgage is best? Looking for clarity on whether it makes more sense financially to buy a home or continue to rent? A and N Mortgage offers a mortgage calculator for that!
After using a mortgage calculator, the next best thing to do is to consult with a mortgage specialist. Because of the limitations of these calculators, don’t get too excited (or discouraged!) by the number.
Calculators can’t account for any nuances like a person can, which is why it’s important to speak with a mortgage expert before making any final conclusions about your dreams of homeownership.
When you’re ready to move forward with the home buying process, the team at A and N Mortgage is here to help! Call our team today at (773) 305-LOAN for a free quote and to discuss all the tools and resources that we have available to you.
We look forward to helping you finance the home of your dreams.
A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.
