What is A Mortgage Calculator and How It Works?
What is a Mortgage Calculator?
A mortgage calculator is a type of automated tool that helps users get an estimate of their monthly mortgage payment. You can enter a different home price, down payment amount, interest rate and loan term to find out how your monthly payment changes according to that.
A potential borrower can use a mortgage calculator to find out their borrowing capacity, a mortgage lender can compare a home buyer’s total monthly income and total debt intake capacity. A Calgary mortgage calculator helps add up all income sources, your credit score, down payment, etc. to come out with an estimated monthly mortgage payment.
What’s included in a mortgage loan calculator?
A mortgage loan calculator has the following basic heads for input:
- Your home price
- The amount you put into the down payment
- Mortgage loan term
- Interest Rate
Some calculators go a step further and also take in your credit score range, zip code, and HOA fees which gives you a more accurate payment estimate. This way you get a better picture of your mortgage payments and can purchase with added confidence.
The Math behind Our Mortgage Calculator/Equation for mortgage payments
Here is the formula that is used for calculating mortgage payments is as follows:
M = P [ i (1 + i) ^ n ] / [ (1 + i) ^ n – 1]
Where the variables are as given below:
- M stands for the monthly mortgage payment.
- P is the Principal Amount taken in the mortgage loan.
- i is the monthly rate of interest. Most mortgage lenders list the interest rates as an annual figure, so you would require to divide it by 12 to find the monthly interest rate. For instance, if your interest rate is 5%, then the monthly rate would be 0.05/12 = 0.004167.
- n is the number of payments you need to make over the loan tenure. So, if you take a 30-year fixed-rate mortgage loan as an example- that means n = 30 (years) x 12 (months) = 360 payments, in total.
You just need to put in the values in this formula to get an estimate of how much loan you can afford. You will also get to know if you are putting down enough money or not. You can adjust your figures based on the estimate given by a mortgage calculator.
How to use a mortgage payment calculator?
The mortgage calculator will have several heads and you have to enter relevant information under them. Enter the purchase price (if you are buying a home) under “Home Price” or the current value of the house, if you are refinancing. Enter the down payment amount under the “Down Payment” head or the equity amount (if you are refinancing). Under the “Interest rate”, enter your mortgage interest rate. Adjust the mortgage term under “loan term” and then the calculator will give you an estimate of your monthly mortgage payments.
Some mortgage calculators also provide you with the privilege of entering the property taxes, homeowners insurance and homeowner’s association fees, etc. A mortgage calculator also allows you to compare different loan types. You could also get your amortization schedule to get an idea of how the principal balance, equity (principal paid) and the total interest paid, change over the loan period.
You can adjust your house price in the calculator and see how the monthly mortgage payment changes. This will help you get an idea of your house affordability. This input depends on your monthly income, debts, credit scores and down payment savings. The thumb rule states that you should opt for a mortgage loan when your DTI ratio (Debt-to-income) is roughly 36% or less. Higher the ratio, the less likely it is for you to be able to afford the loan.
DTI = (total monthly debt payments / gross monthly income) x 100
Down Payment is the amount of money you pay, for the house you are purchasing, before leaving the rest amount to be taken care of by a mortgage loan. For example, if you pay 20% of the purchase price of the house, then 80% of the purchase price will be your mortgage loan and 20% will be known as your down payment.
Lenders deem 20% to be a standard down payment, but that is not quite the real-life scenario. Most borrowers can put down an amount in the range of 10% to 15%. If you cannot afford that, then go for government-insured mortgage loans, they allow a down payment of 3.5% too.
You can input the interest rates that various mortgage lenders provide and check how the mortgage payments differ. Keep in mind that your mortgage rate depends on several factors like your credit score and debt-to-income ratio.
You have the option to see how your mortgage payment changes with change in the loan term. The mortgage payment will be at a certain figure for a 30-year loan, something else for a 15-year loan and so on.
Deciding how much you can afford
You can find online calculators that give an estimate of how much you can afford. Such calculators take into concern the standard mortgage payment elements, which are the principal and the interest. They also take into account other factors like taxes, insurance, homeowner association dues, etc. which help in determining a real-life monthly payment estimate.
You can also get an estimate of your income and debt like a lender does and give yourself the maximum home loan amount you could afford. To do this, you need to input the following data into the calculator:
- Your annual income
- Your mortgage loan term
- Interest rate
- Your monthly recurring debt
The calculator will estimate your property taxes and your insurance. You can adjust those values as well. Enter the monthly HOA dues (if applicable). Now, the results will be shown, including the following:
- An estimate of the maximum mortgage amount
- An estimate of the monthly mortgage payment
- The maximum amount a mortgage lender might consider giving you.
- Your mortgage payment for that amount.
The following tips will help you better decide how much of a mortgage loan you can afford:
- Most financial advisors say that people should spend at most 28% of their gross income on housing (mortgage payment), and at most 36% of the gross income on their total debt, which includes credit cards, student loans, mortgage payments, medical bills, etc.
- You need a Debt-to-income ratio of 50% for some loans. Most lenders consider this DTI to be a good figure but you also need to consider other expenses like living expenses, retirement, emergency savings, etc. into your house affordability scenario.
- Your annual income might be enough to cover your mortgage or it might not be, so you need to consider this factor to determine how much you can afford. This would also help you take financially sound decisions in the next steps. The last thing you would want to do is take up a 30-year home loan because that is a long commitment.