When you take out a loan which is easy to access nowadays thanks to the liberal lending policy and numerous lending sources, you must make sure that the monthly bill does not affect your monthly budget and make it difficult to manage your finance.
You should make a proper and planned approach after doing extensive research on:
- The lending company
- The loan products as well as
- Your ability to repay.
This will help you to stay on the repayment schedule every month.
As it is applicable for all loans, it is especially required that you be more cautious when you take out a mortgage loan as it involves a lot of money and an extended loan term.
The best way to approach is to use a free mortgage calculator. If you use an easy to use mortgage calculator you will be able to have a fair idea about your monthly mortgage payment. You will be able to see how the monthly payment varies when you run different numbers and make updates to:
- The price of your home
- The interest rate
- The down payment and
- The loan term.
Well, it is true that your cell phone or even the big calculator that your grandfather uses can also do it. After all, all you need is a set of number buttons and a little screen! However, good mortgage calculator is different and will do more than what your cell phone or a pocket calculator will do. Ideally, such calculators are often termed as a PITI mortgage calculators signifying:
- P for principal
- I for interest
- T for taxes and
- I for insurance.
It can also calculate PMI or Private Mortgage Insurance as well as HOA dues as well to come up with an accurate mortgage monthly payment calculation.
Typically, most of the borrowers overlook these essential inclusions and therefore find them a bit amazed when they find that their monthly mortgage payment is a lot more than what they initially expected. Therefore, make sure that you use such a calculator to take out any hint of uncertainty of the picture.
Elements of the monthly costs
The calculator will take into account all the elements that will make the monthly cost of your mortgage payment. These days, mortgage payments include much more than just the principal and rate of interest which is why you will need to use much more than a bare-bones calculator. Ideally, the mortgage calculator will consider these following five key components to calculate your mortgage payments:
- Principal: Typically, this is the purchase price of your home minus the down payment, if any. This is the amount you borrow.
- Interest: This is the amount that the lender will charge you on the ‘principal.’ Usually, all interest rates are expressed as an annual percentage called APR.
- Property taxes: This is the annual tax that you will pay on your property and land as assessed by the government authority.
- Mortgage insurance: You are likely to pay mortgage insurance if the down payment of your loan is less than 20% of the purchase price of your home. This mortgage insurance will normally protect the interest of the lender in case you default on your mortgage. This mortgage insurance will be canceled once your home equity increases to 20%, provided you do not have an FHA loan.
- Homeowners’ association fee: This is a fee that is paid by all homeowners to the organization that helps in the upkeep and improvements made in the property and its shared amenities.
All these will make your monthly mortgage amount with no surprises or hidden cost in it. Of course, the loan origination fee and other upfront fees are excluded because those are not spread over your loan term and are charged one time.
Use of a mortgage payment calculator
You may wonder now whether or not you can lower your mortgage monthly payment. This is where the use of a mortgage calculator will be really handy providing you with some clarity in your home buying and loaning process. You will be able to work out different payment scenarios.
To use a mortgage payment calculator in the best possible way you will have to consider a few specific factors such as:
- The loan term that you want: If you take a 30-year home loan at a fixed rate of interest, your monthly payment will be much lower but you will pay more in the form of interest over the entire life of the loan as compared to a 15-year mortgage loan at fixed rate but here the monthly payment will be much higher.
- The ARM: Adjustable rate mortgages or ARM may be a good option for some. It starts with a specific loan rate and then changes over time to be higher or lower as per the market condition and set laws.
- Affordability: You should not buy too much home! This means you should make a reality check so that you do not have to borrow more than you can afford to repay every month after meeting with all your monthly responsibilities and obligations.
- Down payment: If you want to reduce your monthly mortgage amount you must put in enough money down instead of the common 3% made these days.
The mortgage payment calculator will help you to know all these and in turn help you to make a more informed decision.
Process to calculate
Going by the math, a typical formula to calculate a mortgage monthly payment will look much like this:
M = P [i (1 + i) ^n] / [(1 + i) ^n – 1]
The different variables considered here are:
- M for monthly mortgage payment
- P for the principal amount
- i for monthly interest rate
- n for number of payments over the loan term.
You can however reduce your monthly payment amount by extend the number of years after reviewing your amortization schedule, buy less house, avoid paying private mortgage insurance, and get a better interest rate. Most importantly, never fall behind on your payment schedule as that will make your monthly payment go up significantly.