The largest budget item for most people is housing. Whether you rent or own a home, this monthly payment has a significant impact on your ability to afford goods and services. If you want to own a home, knowing your mortgage payment can make a difference. Calculating your expenses can give you an idea of how much home you can afford and if a 15-year or 30-year mortgage makes sense. A mortgage calculator simplifies the math and lets you see an estimated monthly payment.
Calculate Your Mortgage Easily with a Mortgage Calculator
A mortgage calculator makes it easy to figure out how much you will owe on your monthly mortgage payment. You can input several data points into the calculator and modify them to discover your monthly payment.
How Your Mortgage is Typically Calculated
Your monthly mortgage payment depends on three factors: the loan length, interest rate, and loan amount. Each factor has several layers that impact your final mortgage payment, but most mortgage calculators let you modify those three data points.
What is a Mortgage Calculator?
A mortgage calculator lets you see how much you will have to pay monthly for your mortgage. This calculator asks you to input several details before giving you a number, and you can make modifications along the way. Some mortgage calculators have additional features that let you see how your credit score will impact your monthly mortgage payments. While these calculators are estimates rather than guaranteed numbers, they give you an idea of what to expect if you buy a home.
How a Mortgage Calculator Works
A mortgage calculator looks at a property’s price and assesses your monthly mortgage based on the down payment and loan length. You can modify your down payment, interest rate, and other numbers to see how your monthly mortgage payment will change. Some calculators let you input your annual income to suggest how much home you can afford.
What are the Components of a Mortgage Calculator
A mortgage calculator uses several components to help aspiring homeowners discover how much they can expect to pay each month. Here’s the list of components you should know.
1. Total Loan Amount
A higher loan amount will result in higher mortgage payments. You can input a total loan amount, but some mortgage calculators present this number to you based on a property’s price and the estimated down payment. You should also anticipate closing costs, as these expenses can get added to your loan if you do not want to pay for them out of pocket.
2. Monthly Mortgage Payment
The monthly mortgage payment is the number most people want to know. The monthly mortgage payment helps consumers assess the affordability of a home. Some calculators also include estimated property taxes, HOA, and insurance to paint a better picture of how much you will have to pay each month for your new home.
3. Down Payment
The down payment represents how much interest-free money goes into the purchase. Conventional mortgages have a 3% minimum down payment requirement which makes it easier to buy a home. However, the low down payment also results in higher mortgage payments and getting private mortgage insurance tacked onto your expenses.
Making a higher down payment will lower your monthly mortgage payments. Calculators let you see how a 20% down payment vs. a 25% down payment will impact your monthly payment.
4. Loan Term/Number of Payments
Your loan term reveals the number of payments you will make over the mortgage’s duration. A 15-year mortgage consists of 180 monthly payments, while a 30-year mortgage consists of 360 monthly payments. While most mortgages have 15-year or 30-year terms, some mortgages are somewhere in the middle.
Having more monthly payments results in lower monthly payments but more interest in the long run. If you opt for a shorter loan term, such as a 15-year mortgage, you will make higher monthly payments but get out of debt sooner. Some real estate investors opt for 30-year mortgages instead of 15-year mortgages because they value current cash flow more than getting out of debt sooner. Homeowners can take a similar approach and focus on budget flexibility, but others may prefer to get out of debt sooner.
A mortgage calculator can help you estimate the feasibility of both routes. Some homeowners can only afford the monthly payments on a 30-year mortgage, while others have enough flexibility to make the higher payments from a 15-year mortgage.
5. Interest Rate
Interest rates play a decisive factor in monthly mortgage payments. A higher interest rate increases the cost of borrowing money and results in a higher mortgage payment. Securing a lower interest rate on your loan creates the opposite effect.
Another key factor with interest rates is whether you get a fixed-rate mortgage or a variable-rate mortgage. Fixed-rate mortgages have fixed interest rates that stay the same throughout the loan’s duration. Variable rate loans feature fluctuating interest rates that change based on market conditions. If the Federal Reserve decides to raise interest rates, homeowners with variable-rate loans will have higher monthly payments. Fixed-rate mortgage borrowers do not have to worry about the Federal Reserve or any other market condition impacting interest rates.
Variable rates tend to be lower than fixed rates in the beginning. However, this accounts for the heightened risk of taking out a variable rate loan and hoping the advertised interest rate stays the same or decreases. If interest rates fall, a homeowner would have to refinance their fixed-rate loan to save money on interest.
The Formula for Calculating a Mortgage
The formula for calculating mortgage payments is straightforward. You need to know the loan amount, interest rate, and length of the loan. Here is the formula:
Monthly mortgage payment = Loan amount x [r x (1 + r) ^ t / ((1 + r) ^ t – 1)]
r = monthly interest rate
t = number of months
Here’s an example.
Assume a new homeowner takes out a $500,000 mortgage with a 5% interest rate for a 30-year mortgage. A homeowner can calculate the monthly rate by dividing the annual rate by 12. For instance, 5% / 12 = 0.42%. Since t is the number of months, a homeowner must multiply the 30-year length by 12 to determine the number of months. In this example, the loan has payments spread across 360 months.
- Monthly mortgage payment = $500,000 x [0.0042 x (1.0042) ^ 360 / ((1.0042) ^ 360 – 1)]
- Monthly mortgage payment = $500,000 (0.019 / 3.468)
- Monthly mortgage payment = $500,000 (0.005)
- Monthly mortgage payment = $2,684.11/mo
It’s easier to calculate this monthly mortgage payment if you run the numbers through a spreadsheet with a fixed formula. However, you can also find online mortgage calculators that will do the work for you. Even though you won’t have to memorize the formula, it is a good idea to know what makes up the formula. Knowing how this calculation works can make you more conscious of ways to lower your monthly mortgage payment and make it more manageable.
How a Mortgage Calculator Can Help You
A mortgage calculator lets you know what you are walking into before you apply for a mortgage. Knowing a certain loan will result in higher mortgage payments than you can afford can save you from an unnecessary hard credit check. You can also approach a home knowing how high your down payment has to be if you want to secure an optimal monthly mortgage payment.
A mortgage calculator lets you anticipate what will likely be your most expensive and recurring budget item. You can plan out space in your budget to afford more home, be honest with yourself if you need a side hustle, or take a different path. Mortgage calculators remove the element of surprise that can shock aspiring homeowners when they see how much it will cost to own a home. If your home search is several years away, you can also use mortgage calculators as inspiration to save and earn more money.
How to Decide How Much Mortgage You Can Afford
It’s important to know how much mortgage you can afford before looking for a home. Having a number in mind can keep you away from buying a home that is above your budget and adding extra stress to your finances.
Taking inventory of your current income and expenses will help you gauge how much money you can allocate for monthly mortgage payments. If you earn $5,000 per month and spend $2,000 per month, that leaves you with $3,000 in profit. It wouldn’t be wise to decide on a $3,000/mo mortgage payment because you wouldn’t have any margin for error. Setting a monthly mortgage payment target of $2,000 – $2,500 gives you a greater margin of safety in case prices go up for your other expenses, but many experts would still suggest that monthly payment is far too aggressive.
Many experts advocate for the 28/36 rule to determine how much you can cover in monthly mortgage payments. This rule states that you should not allocate more than 28% of your monthly pre-tax income to your mortgage payments. The rule goes further in explaining that you should not use more than 36% of your monthly pre-tax income (also known as gross income) on total debts, such as your mortgage, auto loan, student loan, and similar obligations.
Pushing the envelope on either of these numbers increases your risk and can leave you more vulnerable in the future. Having a low margin of safety also hinders your ability to build up an emergency fund in case you lose your job at some point or invest in a retirement fund. Recommended guardrails can keep you safe and act as good starting points when you create a financial plan.
How to Lower Your Mortgage Payments Even More
Knowing your monthly mortgage limit helps with the home search, but applying several strategies to lower your monthly mortgage payments will increase your choices. A mortgage calculator may inform you that the mortgage payment on your desired home comes to $2,100/mo. This amount is too high if your limit is a $2,000/mo mortgage payment, but it’s possible to shave off the extra $100/mo. Trimming the mortgage will make that property eligible for you, and lowering your mortgage is a good perk in general.
Luckily, aspiring homeowners have many ways to lower their monthly mortgage payments. The first way to lower your mortgage payment is to make a higher down payment. Your down payment represents interest-free money that goes into the home and instantly builds equity. Making a down payment higher than 20% can minimize your monthly mortgage payments.
It’s not feasible for everyone to make a 20% down payment, and it doesn’t make sense for everyone to make a higher down payment. In this scenario, you still have ways to lower your monthly payment. Getting a mortgage with a longer term is an easy way to secure lower payments and increase your chances of approval. You can save hundreds of dollars each month by taking out a 30-year mortgage instead of a 15-year mortgage. Granted, you will pay more interest in the long run, but saving money now gives you more choices for your next home.
You can also work on your credit score leading up to your mortgage application. Lenders look at your credit score when deciding what interest rate to give you. A higher credit score will help you get one of the lowest interest rates available. Consumers can raise their credit scores by staying on top of payments, trimming their existing debt, and through other methods. Payment history is the largest component of your credit score, making up 35% of your number.
These strategies can help you secure lower monthly mortgage payments and make homeownership more feasible. Mortgage calculators can inspire action and lead you to look at your career and expenses with a deeper perspective. A home is one of the largest investments you make, but the mortgage can stick around for decades. A good plan will make your mortgage payments manageable as you embark on the journey to financial independence.
