How much should I pay for my mortgage? Calculate your mortgage payments now and be worry-free. Click on this page to learn more
- How do I calculate my mortgage?
- Mortgage calculator variables
- Online mortgage calculator: Key components
- How much mortgage can I get for $500 a month?
- How can I pay my 30-year mortgage in 15 years?
- How much can I borrow for a mortgage based on my income?
- Lender calculations: the other side of the mortgage calculator
Buying a house will be one of the most exciting—and stressful—periods of your life. With housing costs and inflation on the rise, it is more important now than ever to know what you’re getting yourself into financially. That’s where a mortgage calculator comes in.
How do I calculate my mortgage?
It is important to calculate your mortgage to learn how each factor works together to impact your overall monthly rate. Those factors are the total amount you are borrowing from the bank, the amount of time you have to repay your mortgage in full, and the interest rate for your loan.
To calculate your mortgage by hand, you will use this equation: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1].
Does that look easy to you? My congratulations and you can go right ahead and use that calculation. For something simpler, here is our Mortgage calculator:
Mortgage calculator variables
The variables that comprise this equation are:
- M = monthly mortgage payment
- P = the principal amount
- i = monthly interest rate.
- Lenders usually list the interest rate as an annual figure, meaning you must divide it by 12 months. For instance, if your interest rate is 5%, the monthly rate would be: 0.05/12=0.004167.
- n = the number of payments you will have to make throughout the entire loan term.
- For instance, for 30-year, fixed-rate mortgages, that means: n=30 years x 12 months per year—which equals 360 payments.
This equation is the simplest calculation that uses only your timeline, interest rate, and loan amount. It is common, however, to incorporate variables such as homeowner’s insurance, property tax, and/or a down payment. These could all factor into your overall monthly payment.
Online mortgage calculator: Key components
While there are many online tools and apps for first-time homebuyers, using a free online mortgage calculator is a key first step early in the buying process. A breakdown of the basic components of an online mortgage calculator is as follows:
- Loan amount. This is the amount you borrowed from the bank or lender, which is essentially the purchase price minus the down payment. Usually, the largest loan you can borrow will correlate with your affordability, i.e., household income.
- Down payment. The portion of the purchase price covered by the borrower. Twenty percent is a common percentage that lenders want the borrower to make as a down payment. However, borrowers can put down as little as 3%. For down payments under 20%, the borrower is required to pay private mortgage insurance, or PMI. Usually, the more money you spend on the down payment, the better your interest rate will be—and the more likely you will get approved.
- Loan term. The term is the amount of time you have to repay the loan. A typical fixed-rate mortgage comes with 30-, 30-, or 15-year terms. Shorter loan terms (such as 15 or 20 years) usually come with a lower interest rate.
- Interest rate. The interest rate is the percentage of a loan charged as a cost of borrowing.
How much mortgage can I get for $500 a month?
You have used the mortgage calculator above and you want to find out what you can do for a total monthly payment of $500 per month, you will be able to get a mortgage worth $72,553. This, however, is for a loan term of 20 years and an interest rate of 4%. The value of the mortgage you would be able to afford for $500 is of course dependent on variable factors such as the percentages of home insurance and property tax you must pay.
How can I pay my 30-year mortgage in 15 years?
Did you use our mortgage calculator and determine that you could possibly pay your mortgage off quicker? While there are benefits to each of these approaches, it is important to make your choices based on your financial situation and ability to make payments. Here is a breakdown of your options:
- Extra payments. With any money you have left over at the end of every month, you can make extra payments on the principal. By paying off the principal more quickly, you will lower the interest you have to pay over the life of the loan.
- Bi-weekly payments. In this situation, you pay half of the monthly amount every two weeks. In other words, you would make 26 half payments (or 13 full payments) rather than 12. If you choose this option, make sure your lender will accept bi-weekly payments instead of monthly payments.
- Extra monthly payment. This is a good place to put an inheritance or a year-end bonus, for instance. Because half of the interest you pay in a standard 30-year mortgage accumulates in the first 10 years, the sooner into the loan you can do this, the better. The reason is the higher interest rate that comes with the high principal you owe in the earlier years of your mortgage.
- Refinance. In this case, you would replace your current mortgage with a new loan. With a new loan term, you could repay your loan more quickly or cut monthly costs. But remember: a shorter loan term will make the mortgage go away faster but will cost you much more in monthly payments.
- Recast. If you want to lower your monthly payment, keep your interest rate, and avoid refinancing fees, recasting your mortgage is a good option. Fees for recasting are between $200 and $300 and includes a lump sum payment toward your principal. To reflect the new balance, your lender will then modify your amortization schedule.
- Modify. This may mean lowering the interest rate or switching from a fixed-rate mortgage to an adjustable-rate mortgage (or vice versa). Loan medication is usually for anyone who has fallen behind on their payments, usually because of increased living expenses, disability, unemployment, or other loss of income. Remember: there are many different types of loans to choose from.
- Other debts. One key to sound money management is to pay off debts that contain higher interest rates first. For example, you could be paying 5% interest in mortgage debt and 18% in credit card debt. If you are struggling with repaying several loans, debt consolidation might be a good option.
- Downsizing. This could mean simply purchasing a smaller property or moving to a more affordable area. When shopping for a home, there are some questions worth asking yourself: What is your budget? How much are closing costs? What are the conditions of the home? A trusted real estate agent can help you answer these questions and more.
How much can I borrow for a mortgage based on my income?
Most prospective homeowners will be able to get a mortgage that is two to two-and-a-half times higher than their annual gross income. In other words, if you earn $100,000 a year, you should be able to afford a mortgage between $200,000 and 250,000. It should be noted, however, that this is a general rule.
When you are trying to decide on a house, there are a few factors that you will have to consider. One is what your lender thinks you will be able to afford—which is calculated by your gross income, front-end ratio, back-end ratio, and credit score. Another factor is what type of house you want to live in, for how long, and what types of consumption you are willing to give up to afford it.
Read next: 7 red flags that could ruin your mortgage application | Mortgage Professional (mpamag.com)
Lender calculations: the other side of the mortgage calculator
Here is a breakdown of how lenders calculate what you can afford:
- Gross income. Essentially, this means your base salary plus your bonus income, including self-employment earnings, part-time earnings, alimony, child support, disability, and Social Security benefits.
- Front-end ratio. Also known as the mortgage-to-income ratio, the front-end ratio is the percentage of your yearly gross income that you can dedicate toward paying off your mortgage every month. The four components of principal, interest, taxes, and insurance make up your monthly mortgage payment. As a rule, your front-end ratio should be less than 28% of your gross income.
- Back-end ratio. The back-end ratio calculates how much of your gross income is needed to pay your debts, such as credit card payments, outstanding loans such as car loans or student loans, or child support. This basically means if you pay $1,000 per month in debts and you make $2,000 per month, your back-end ratio is 50%. Most lenders suggest this ratio be less than 43% of your gross income.
- Credit score. Mortgage lenders use your credit score as part of their formula to determine your level of risk. If you have a low credit score, you can expect to pay a higher interest rate. It is important to pay attention to your credit reports if you want to purchase a property.
Did our mortgage calculator tell you anything interesting? Is there anything about calculating mortgage payments that you don't understand still? Let us know in the comment section below.