- How to Calculate Mortgage Payments
- Breaking Down the Mortgage Payment Formula
- Mortgage Fees and Costs
- Estimating How Much House You Can Afford
- What Is the Best Mortgage Term for You
- 15-Year Mortgage Vs. 30-Year Mortgage
- How to Get a Lower Mortgage Payment
- How to Choose a Mortgage Lender
- Frequently Asked Questions (FAQs)
- 1. How Does a Mortgage Work?
- 2. What are the Types of Mortgages?
- 3. How Do You Apply for a Mortgage?
- Next Up in Mortgages
A mortgage is often a necessary part of buying a home, but it can be difficult to understand what you can actually afford. A mortgage calculator can help borrowers estimate their monthly mortgage payments based on the purchase price, down payment, interest rate and other monthly homeowner expenses.
How to Calculate Mortgage Payments
Whether you’re shopping around for a mortgage or want to build an amortization table for your current loan, a mortgage calculator can offer insights into your monthly payments.
Follow these steps to use the Forbes Advisor mortgage calculator:
- Enter the home price. Start by adding the total purchase price for the home you’re seeking to buy on the left side of the screen. If you don’t have a specific house in mind, you can experiment with this number to see how much house you can afford. And if you’re considering making an offer on a home, this calculator can help you determine how much you can afford to offer.
- Input your down payment amount. Next, add the down payment you expect to make as either a percentage of the purchase price or as a specific amount.
- Enter your interest rate. If you’ve already shopped around for a loan and have been offered a range of interest rates, enter one of those values into the interest rate box on the left. If you haven’t prequalified for an interest rate yet, you can enter the current average mortgage rate as a starting point.
- Choose a loan term. To help calculate your monthly mortgage payment, enter a loan term up to a maximum of 30 years. If you haven’t been approved for a loan term and interest rate, the rate you select here should correspond with the average rate you entered above. For example, if you choose a 15-year term, use the average rate for a 15-year mortgage. If, instead, you want a balance between low monthly payments and a shorter term, you can use this portion of the calculator to compare your options.
- Add in taxes, insurance and homeowners association (HOA) fees. This portion of the calculator is optional, but it can help give you a more accurate picture of your potential monthly payments. If you have the information available, plug in your monthly property tax, private mortgage insurance (PMI), homeowners insurance and HOA fees. If you don’t have these numbers in front of you, some information may be available through your real estate agent or your local property assessor’s website.
- Review your loan details. Once you enter all of the relevant information on the left side of the screen, the calculator will auto-populate your payment breakdown on the right. This portion of the calculator lets you view your monthly payments as well as your estimated payoff month. Navigate to the amortization schedule tab to view how much of your annual payments will go toward interest and principal. You can also toggle between the annual and monthly view to see a breakdown of each monthly payment.
Breaking Down the Mortgage Payment Formula
The formula behind paying down a mortgage is complex, but it can be handy. It helps homeowners and would-be homeowners see what paying more money would mean for their monthly budget and their overall wealth profile.
To see the full breakdown, check out our mortgage payoff calculator.
Mortgage Fees and Costs
If this is your first time shopping for a mortgage, the terminology can be intimidating. It also can be difficult to understand what you’re paying for—and why.
Here’s what to look for when reviewing your mortgage costs and fees:
- Principal: Principal is the amount of money you borrowed on the mortgage. A portion of each payment will go toward paying this off, so the number will go down as you make monthly payments.
- Interest rate: This is essentially what the lender is charging you to borrow the money. Your interest rate is expressed as a percentage and may be fixed or variable.
- Property taxes: Property taxes are imposed by your local tax authority. This number can usually be viewed on your recorder or assessor’s website—wherever you access property cards and other real estate records.
- Homeowners insurance: Homeowners insurance is required to protect you and your lender in the case of damage to your home. If you’re considering a home, ask the real estate agent if they have any information about current insurance costs. Otherwise, contact your local insurance agent to get a quote.
- Mortgage insurance: Also known as private mortgage insurance—or PMI—this protects the lender in case you default on your mortgage. It typically ranges from 0.58% to 1.86% of your total mortgage amount and you will need to factor this in if your down payment is less than 20%.
- HOA fees: Homeowner Association fees may be required if you buy a property in a shared community such as a condominium complex. HOAs are private organizations set up to govern and maintain such spaces. The fees may be nominal, but they might make your monthly payments unaffordable.
Estimating How Much House You Can Afford
How much house you can afford depends on several factors, including your monthly income, existing debt service and how much you have saved for a down payment. When determining whether to approve you for a certain mortgage amount, lenders pay close attention to your debt-to-income ratio (DTI).
Your DTI compares your total monthly debt payments to your monthly pre-tax income. In general, you shouldn’t pay more than 28% of your income to a house payment, though you may be approved with a higher percentage.
Keep in mind, however, that just because you can afford a house on paper doesn’t mean your budget can actually handle the payments. Beyond the factors your bank considers when pre-approving you for a mortgage amount, consider how much money you’ll have on-hand after you make the down payment. It’s best to have at least three months of payments in savings in case you experience financial hardship.
Along with calculating how much you expect to pay in maintenance and other house-related expenses each month, you should also consider your other financial goals. For example, if you’re planning to retire early, determine how much money you need to save or invest each month and then calculate how much you’ll have leftover to dedicate to a mortgage payment.
Ultimately, the house you can afford depends on what you’re comfortable with—just because a bank pre-approves you for a mortgage doesn’t mean you should maximize your borrowing power.
What Is the Best Mortgage Term for You
A mortgage term is the length of time you have to pay off your mortgage—stated another way, it’s the time span over which a mortgage is amortized. The most common mortgage terms are 15 and 30 years, though other terms also exist and may even range up to 40 years. The length of your mortgage terms dictates (in part) how much you’ll pay each month—the longer your term, the lower your monthly payment.
That said, interest rates are usually lower for 15-year mortgages than for 30-year terms, and you’ll pay more in interest over the life of a 30-year loan. To determine which mortgage term is right for you, consider how much you can afford to pay each month and how quickly you prefer to have your mortgage paid off.
If you can afford to pay more each month but still don’t know which term to choose, it’s also worth considering whether you’d be able to break even—or, perhaps, save—on the interest by choosing a lower monthly payment and investing the difference.
15-Year Mortgage Vs. 30-Year Mortgage
You can get a mortgage for nearly any term—that is, any timeframe—but the two most common are 15-year and 30-year periods. With a 15-year mortgage, you’ll pay less in interest, but your monthly payment will be much higher. Stretching the mortgage to 30 years makes the monthly payment more affordable, but you’ll be paying off your loan for much longer, and you’ll wind up paying a lot more interest.
How to Get a Lower Mortgage Payment
There are several ways you can secure a lower monthly payment on your mortgage:
- Choose a longer term
- Have a larger down payment
- Choose a lower-priced property
- Secure a lower interest rate
How to Choose a Mortgage Lender
You have many options when it comes to choosing a mortgage lender. Banks, credit unions and online lenders all offer mortgages directly, while mortgage brokers and online search tools help you compare options from different lenders.
It’s important to make sure you feel comfortable with the broker or company you’re working with because you’ll need to communicate with them frequently during the application process—and in some cases, after the loan closes.
You may want to start with the banks or other institutions where you already have accounts, if you like their service. Also, ask your network of friends and family, and any real estate professionals you’re working with, for referrals.
Related: Best Mortgage Lenders
Frequently Asked Questions (FAQs)
1. How Does a Mortgage Work?
A mortgage is a secured loan that is collateralized by the home it is financing. This means that the lender will have a lien on your home until the mortgage is paid in full. After closing, you’ll make monthly payments—which covers principal, interest, taxes and insurance. If you default on the mortgage, the bank will have the ability to foreclose on the property.
2. What are the Types of Mortgages?
In addition to there being multiple mortgage terms, there are several common types of mortgages. These include conventional loans and jumbo mortgages, which are issued by private lenders but have more stringent qualifications because they exceed the maximum loan amounts established by the Federal Housing Finance Administration (FHFA).
Prospective homebuyers also can access mortgages insured by the federal government, including Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), U.S. Department of Veterans Affairs (VA) and 203(k) loans. Minimum qualifications for these mortgages vary, but they are all intended for low- to mid-income buyers as well as first-time buyers.
3. How Do You Apply for a Mortgage?
Mortgages are available through traditional banks and credit unions as well as a number of online lenders. To apply for a mortgage, start by reviewing your credit profile and improving your credit score so you’ll qualify for a lower interest rate. Then, calculate how much home you can afford, including how much of a down payment you can make.
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