Home Loan Calculator

Whether you’re a first-time homebuyer or refinancing an existing home, a mortgage calculator can help you understand your monthly payments. Understanding how your down payment, interest rate, term, property location, and other factors will affect the monthly cost is vital. Keep reading to learn more about the mortgage payment calculator and why to use one.

Mortgage Definition

A mortgage is a loan used to maintain or purchase land, a home, or other properties. Mortgages are secured loans where the property serves as collateral. They are agreements created to show that the borrower consents to make regular payments to a lender over time for the loan principal and interest.

Applying for a mortgage is typically done through a lender. This person will check to ensure the buyer meets all requirements, including down payments and credit scores. A mortgage application goes through a rigorous underwriting process before entering the closing phase. There are several types of mortgage loans, including fixed rate and conventional loans.

How Mortgages Work

Businesses and individuals use mortgage loans to purchase real estate without paying for the entire purchase up front. Once a mortgage is approved, the borrower is expected to repay the loan principal plus interest over a certain amount of years until the property is paid for and owned free and clear.

Many traditional mortgages feature a mortgage amortization schedule, where the regular payments are the same each month. The only difference is that the proportions of interest and principal will be applied differently over the life of the loan. Most mortgages in the U.S. have terms that last for 15 or 30 years.

You may even hear a mortgage referred to as a lien against the property or a claim on the property. Hence, if the borrower fails to follow the mortgage amortization schedule, the lender may foreclose on the real estate.

For instance, a buyer pledges their home to a lender, which means the lender now has a claim on the house. This provides the lender interest in the home, where if the buyer defaults on the loan they can foreclose. During a foreclosure, the lender can evict the buyer, sell the house, and use the money to recoup the mortgage debt.

The Mortgage Process

The mortgage process begins with borrowers submitting loan applications to one or more lenders. The lender will want evidence that the potential buyer can repay the loan. They will ask for documentation such as investment and bank statements, proof of current employment, and tax returns. The lender will also run credit checks to look at your payment history.

Upon approval, the lender offers the borrower a mortgage for a specified amount and interest rate. The process can be started while you’re still shopping for a home through a preapproval or after you’ve already found one. Checking with lenders to ensure you’re pre-approved is an effective way to better position yourself in the housing market. When a buyer has a preapproval letter, it tells the seller that the person has the funds to support their offer.

After the buyer and seller agree on terms, there will be a meeting for closing. Sometimes the homebuyers attend, and sometimes it’s just their representatives. The closing process is when the borrower pays the down payment, and the seller transfers ownership to the buyer and receives their money. The buyer may need to sign additional mortgage paperwork, and the lender may collect origination fees for the loan. At times, these fees come in the form of mortgage points.

Types of Mortgages

There are several types of mortgage loans available. Among the most common are 15-year and 30-year fixed-rate loans. However, some mortgages feature terms as low as five years, while others can last for 40 years or more. Using an amortization calculator, you'll find that if you take out longer loans, it will reduce the cost each month, but you'll pay more interest over the life of the loan.

Yet, mortgages can differ in other ways aside from the length of the terms. For example, there are specific types of home loans such as Department of Veteran Affairs Loans (VA), Federal Housing Administration loans (FHA), and Department of Agriculture loans (USDA). These loans are designed for specific home buyers who do not have the credit scores, down payments, or income to qualify for conventional home loans.

Here’s a closer look at the most common mortgage types:

Adjustable-Rate

Adjustable-rate loans feature a fixed interest rate for a beginning term and then typically change based on current interest rates. Often the initial interest rate is lower than the current market rate, making such mortgages more affordable right away. But they are potentially less profitable in the future if interest rates rise sharply. These loans generally have caps on how much the interest rate can increase each time and in total over the loan term.

Interest-Only

Interest-only home loans are less common than other types and often involve complex mortgage amortization schedules that are best for sophisticated borrowers. Beware that it’s not uncommon for these loans to require a large balloon payment at the end of your term.

This mortgage type caused many homeowners to face financial devastation during the early 2000s housing bubble.

Fixed-Rate

This is one of the most popular mortgage types because borrowers know precisely what they’ll pay each month. After the loan is originated and the interest rate is locked in, it will not change until the end of the loan or until you refinance. Though these loans are great for budgeting your monthly bills, you will not benefit from decreases in interest rates over time, as you would from an adjustable-rate mortgage.

Reverse Mortgages

Of all the available mortgages, these are the most unique. They are designed for people over 62 who want to convert a portion of their home equity into cash. These financial instruments allow homeowners to borrow against their home’s value and receive the payment in one lump sum, a line of credit, or fixed monthly payments. The remaining loan balance comes due when the borrower sells the home, permanently moves from it or passes away.

Current Average Mortgage Rates

The amount you’ll pay for a mortgage depends on the type you choose, the term, interest rates, and discount points paid. Understanding that interest rates can vary from lender to lender or from week to week is crucial, so be sure to check out more of the available opportunities in the market.

In 2020, mortgage rates in the U.S. reached near-record lows, with the average rate falling around 2.66 percent for a 30-year fixed rate. Mortgage rates remained rather low through 2021 but began to trend upward during the last month of the year. Here’s a look at home loan interest rates as of September 2022:

• Fixed-rate 30-year mortgage: 6.89%
• Fixed-rate 15-year mortgage: 5.528%
• 10/6 Adjustable-rate mortgage: 6.435%

Payments Included in a Mortgage

There are four main factors included in the mortgage payment calculation. These factors are interest, principal, insurance, and taxes. The following information will utilize a $100,000 mortgage for the example.

Principal

Each monthly mortgage payment includes a specific amount that goes straight to the loan’s principal balance. Mortgages are structured, so the principal payments begin low and increase with each completed payment. Hence, payments made over the first several years have more applied toward interest than the principal, and the opposite is true at the end of your term. In the example, the principal amount is $100,000.

Interest

The lender charges interest to reward themselves for taking the risk to loan you the money. This rate directly impacts the amount a borrower pays each month. The higher the interest rate, the higher the monthly mortgage payments.

It’s vital to mention that higher interest rates will reduce the overall amount you can borrow, while lower rates will increase the amount. For our example, let’s say the interest rate on the $100,000 principal is 6 percent. The combined interest and principal on a 30-year loan would be right around $600, depending on your location. However, if the $100,000 loan had a 9 percent interest rate, the monthly mortgage payment would be closer to $800.

Taxes

Property or real estate taxes are also assessed by the local government and used to fund public programs such as police, schools, and fire departments. These taxes are assessed yearly, but you can pay them monthly in your mortgage payments. The amount you owe should be divided by the number of payments you will make in one year. Your lender will collect and deposit the payments into escrow until the taxes are due.

Insurance

The last factor that impacts your mortgage payment is insurance, which is handled similarly to property taxes. With this, you should understand that two forms of insurance may be included in your mortgage amortization schedule.

The first type is property insurance, which protects the property and belongings from disasters such as theft or fire. The other type of insurance is PMI, which is mandatory for anyone purchasing a home with less than 20 percent down. This insurance is in place to protect the lender if the borrower cannot repay the loan.

Since this insurance decreases the risk of default on the loan, PMI allows lenders to sell the mortgage to investors. The PMI ensures that the investor’s debt investment will be recovered. The coverage can be dropped after the borrower’s home has a minimum of 20% equity.

Though Interest, principal, taxes, and insurance account for most mortgages, you can opt for a home loan that does not include insurance or taxes as part of the payment. Remember that while your monthly payments are lower, you are still responsible for paying the insurance and taxes.

How to Find the Best Mortgage

Credit unions, banks, and loan and savings institutions used to be some of the only places to secure home loans. Today, there are many mortgage lenders to choose from, including nonbanks.

When shopping for the best mortgage, be sure to use a free mortgage calculator to help compare estimated payments based on the mortgage type, down payment, and interest rate. It’s also a great tool to help you decide how much home you can comfortably afford.

Aside from the interest and principal, the mortgage servicer or lender may also open an escrow account to pay property insurance, taxes, and other expenses. These costs are added to your monthly loan payments.

Ultimately, shopping around is the easiest way to find the best mortgage. After you use the amortization calculator to see how much house you can afford, you must find a lender who will offer a loan within those limits.

How to Qualify for a Mortgage

Lenders check several vital factors to determine if a person can qualify for a home loan. Here are the questions you should ask yourself before applying for a mortgage:

• Do you have what is considered a “good” credit score?
• Have you recently filed for bankruptcy or had a foreclosure?
• Do you have a lot of monthly debt already?
• Does your credit history contain collections or many late payments?
• Are your credit cards maxed?

Saying yes to just one of these factors does not automatically count you out. For example, with a credit score, some home loan types allow you to have as low as 580. However, if you’ve answered yes to multiple questions on the list, it may be best to work on those points before applying with a lender.

Important Mortgage Terminology to Know

An online mortgage loan calculator will help estimate your monthly mortgage payments with little information. To effectively use the calculator, here is some terminology you should know:

• Home Price: The dollar amount you’ll need to pay for the house.
• Down Payment: The money given to the home’s seller.
• Loan Amount: The amount that will be financed to buy the home. You deduct the down payment amount from the home price to find this number.
• Loan Term: The length of time your mortgage will last.
• Interest Rate: The amount paid to the lender for allowing you to borrow the money.

Example of Calculating a Mortgage in the U.S.

Let’s suppose that the home you want to buy is $100,000. The lender offers you a loan for 30 years at 6 percent interest. To determine your monthly mortgage payments, use the free mortgage calculator and input this data:

• Purchase Price: $100,000
• Down Payment: We used 20% for our example
• Mortgage Term: 30-year fixed-rate
• Zip Code: We used 90005 for our example

As you’ll see, the monthly payment on an $80,000 loan would be $622.90.