Mortgage Calculator

The Mortgage Calculator is a helpful tool for calculating the monthly payment and other expenditures connected with owning a home. You can include additional fees or an annual percentage increase in the total costs associated with the mortgage. U.S. citizens are the primary target audience for this calculator.

Mortgages

A mortgage is a loan guaranteed by a piece of property, most commonly a house. Lenders define real estate loans as the money borrowed to pay for a property. Buyers who take out a home loan from a lender are often required to pay it back within a certain period, usually 15 or 30 years in the United States. Each month, the buyer pays back the loan. The principal, or original amount borrowed, is a portion of the monthly payment.

Interest is the value paid to the lender for the use of the money. Escrow accounts are sometimes used to offset the costs of property taxes and insurance. Until the last monthly payment is paid, the buyer cannot be regarded as the complete owner of the mortgaged property.

The 30-year fixed-interest loan is a prevalent mortgage type in the United States. In the United States, mortgages are the primary means through which individuals finance home purchases.

Components of a Mortgage Calculator

There are usually several components to a mortgage loan, and our calculator includes them. The loan amount is the sum borrowed from a bank or lender. This amount is equal to the purchase price minus the down payment. The maximum loan amount that can be taken out is usually related to family income or affordability.

The loan term defines when you must repay the loan in full. Fixed-rate mortgages often have terms of 15, 20, or 30 years. Shorter repayment terms, such as 15 or 20 years, often have lower interest rates.

Down payment is the initial payment for the purchase, usually a proportion of the entire cost. Typically, mortgage lenders need a down payment of at least 20% of the total loan amount. In some cases, borrowers can put down 3%.

Borrowers will be compelled to purchase private mortgage insurance (PMI) if their down payment is less than 20%. Borrowers must have this insurance until the loan’s outstanding balance falls below 80% of the home’s initial purchase price. The higher the down payment, the better the interest rate and the more likely the loan will be approved.

The interest rate is the proportion of the loan charged as a borrowing fee.

There are two kinds of mortgages: fixed-rate (FRM) and adjustable-rate (ARM). As the name suggests, the FRM loan’s interest rates are fixed throughout the loan. Only fixed rates are calculated using the calculator above.

With ARMs, interest rates are usually fixed for a certain period, after which they are periodically adjusted based on market indices. ARMs shift some risk to borrowers. Therefore, initial interest rates of ARMs are usually 0.5-2% lower than FRMs with the same loan term.

Mortgage interest rates are usually expressed in annual percentage rate (APR), sometimes called nominal APR or effective APR. This is the interest rate expressed as a periodic rate multiplied by the number of compounding periods in a year. For example, if the mortgage rate is 6% APR, the borrower will have to pay 6% divided by twelve, which is 0.5% interest each month.

Costs of Owning a Home and Getting a Mortgage

Monthly mortgage payments make up most of the financial costs of owning a home. But there are other significant costs to keep in mind. For categorization, these expenses are divided between recurrent and non-recurring costs.

Recurring Expenses

Most recurring expenses persist throughout the life of the mortgage and beyond. Real estate taxes, home insurance, HOA fees, and other costs increase over time as a byproduct of inflation. They are a significant financial factor.

Recurring costs are placed under the “Include Options Below” checkbox in the calculator. The calculator also has additional options for the annual percentage increase in the “More options” section. Their use can lead to more accurate calculations.

Home insurance is a type of insurance that covers a person’s home against various kinds of perils. It protects against lawsuits involving injuries on and off the property. Personal liability coverage can be included in home insurance policies. The cost of house insurance is affected by several variables, including the location, age, condition of the home, and the level of protection desired.

Property taxes. Property owners pay taxes to local governments. Typically, in the United States, property tax is handled by local or county governments. Local property taxes are levied in each of the 50 states. Generally, homeowners in the United States spend around 1.1 percent of the value of their homes on property taxes each year.

HOA charge is a fee levied on a property owned by a homeowner’s association (HOA). This organization maintains and enhances the property and environment of the communities under its jurisdiction. HOA fees are often required for condominiums, townhouses, and specific single-family residences. Annual HOA fees are typically less than 1% of the property value.

Private mortgage insurance (PMI). Private mortgage insurance (PMI) protects the lender when a borrower cannot repay a loan. Lenders in the U.S. often demand that borrowers purchase PMI if the down payment is less than 20 percent of the property’s worth and the loan-to-value ratio (LTV) is lower than 78-80%. Down payment, loan size, and borrower credit influence the cost of private mortgage insurance (PMI). Between 0.3 and 1.9 percent of the loan amount is charged each year.

Additional costs. Annual property maintenance can cost up to 1% of the property’s value. Utilities, house upkeep, and other expenses are included in this cost category.

Non-recurring expenses

The calculator does not include these expenses, but they should not be overlooked.

Initial improvements: Before moving in, some purchasers like to make fundamental improvements to the property. Renovating a home can encompass everything from replacing the flooring and painting the walls to completely redoing the inside or outside. Renovation expenditures may rapidly pile up, but owners have the option of delaying or avoiding them altogether.

Closing costs are the fees incurred after a real estate transaction. A mortgage closing cost in the United States may include the title service fees, attorney fees, property transfer tax, survey fees, recording fees, mortgage application fee, brokerage commission, home warranty, inspection fee, appraisal fee, pro-rata property taxes, pre-paid home insurance, pro-rata interest, pro-rata homeowner association dues, etc.

The buyer usually bears these expenses, although a “credit” might be negotiated with the seller or lender. On a $400,000 transaction, it is not uncommon for a buyer to pay around $10,000 of closing costs.

Miscellaneous: New furnishings, new appliances, repairs, and relocation expenses are one-time costs associated with buying a house.

Repayment Ahead of Schedule and Additional Funds

Borrowers may want to pay off their mortgages sooner rather than later for various reasons, including, but not limited to, lower interest rates, the desire to sell their house, or the ability to refinance. For example, our calculator can consider one-time or regular payments. Borrowers should know the benefits and drawbacks of making extra mortgage payments.

Strategies for Paying Off Debt Early

In addition to final mortgage repayment, there are three main ways to do this. To save money on interest, borrowers use these methods. You can use a combination of these strategies or use them individually.

Extra payments

It is simply an extra payment on top of the monthly payment. In typical long-term mortgages, a large portion of the additional costs goes toward paying off interest, not principal. Any extra charges reduce the loan balance, lowering the interest and allowing the borrower to repay the loan earlier in the long run.

Some people develop the habit of making extra payments every month; others do it when possible. The mortgage calculator has additional parameters for including many extra costs, and it can be helpful to compare the results of a mortgage supplement with and without extra payments.

Biweekly payment

Under the biweekly payment plan, the borrower makes a payment equal to half the typical monthly amount every two weeks. Given that there are 52 weeks in a year, the borrower will make 26 biweekly payments. This equates to 13 full monthly payments per year, rather than the 12 payments made on a standard monthly schedule.

This approach can align well with the budgeting cycle of individuals who are paid on a biweekly basis, as it allows them to synchronize a portion of each paycheck directly towards their mortgage payment. Over the span of a year, this strategy results in one additional monthly payment, which is applied to the principal. This can accelerate the reduction of the principal balance and may result in significant interest savings over the duration of the loan, as well as a potential reduction in the overall term of the mortgage.

Refinancing into a shorter term loan

Refinancing is taking out a new loan to pay off an existing one. Using this strategy, borrowers can shorten the loan term, which usually results in a lower interest rate. This speeds up repayment and saves interest costs. However, the borrower usually makes a larger monthly payment. Also, when refinancing, the borrower will likely have to pay closing costs and fees.

Reasons for paying back a loan early

You can gain the following benefits from making additional payments:

A shorter repayment timeframe: Shortening the repayment period means the repayment will come sooner than the original term specified in the mortgage contract. This causes the borrower to pay off the mortgage faster.

Lower interest costs: Borrowers can save on interest, which is often a significant expense.

Personal fulfillment: The sense of emotional well-being that can come with debt relief. Being debt-free also allows borrowers to spend and invest in other spheres.

The downsides of paying off debts early

Additional payments, on the other hand, come at a cost. Loan applicants should consider the following before making extra payments on their mortgage:

Prepayment penalties: An early repayment penalty is an agreement between the borrower and the mortgage lender that regulates what the borrower can repay and when. The penalty amount is usually expressed as a percentage of the balance owed at the time of prepayment or a certain number of months of accrued interest.

The penalty amount usually decreases until it eventually goes away within five years. A one-time repayment due to the sale of a home is generally not subject to the prepayment penalty.

Locking up the house’s capital: Money invested in a home is money the borrower cannot spend elsewhere. This may eventually force the borrower to take out an additional loan if there is an unforeseen need for cash.

Lost tax deduction: Borrowers in the U.S. can deduct mortgage interest costs from their taxes. Lower interest payments result in a lower deduction. However, only taxpayers who itemize the amount owed (rather than receiving the standard deduction) can take advantage of this benefit.

Opportunity Costs: Prioritizing early mortgage repayment may not always be the optimal financial decision. Given that mortgage rates are often lower than the potential returns from other investments, it's important to weigh the benefits. For instance, using surplus funds to pay off a mortgage carrying a 4% interest rate might not be as beneficial if those same funds could yield a return of 7% or more if invested wisely. The difference in potential earnings represents an opportunity cost that should be carefully considered in financial planning.

A brief history of mortgages in the United States

In the early decades of the 20th century, purchasing a home often meant providing a large down payment and agreeing to a short-term loan, which typically required a significant balloon payment after a period of about three to five years. Such stringent terms meant that homeownership was out of reach for a majority of Americans; historical data suggests that before the 1930s, homeownership rates hovered around 40%.

The onset of the Great Depression saw a drastic increase in foreclosures, with estimates indicating that nearly 25% of mortgage holders lost their homes to foreclosure. This period underscored the need for reform in housing finance.

Responding to this need, the U.S. government took steps in the 1930s to reshape the housing finance system. The creation of the Federal Housing Administration (FHA) and the Federal National Mortgage Association, commonly known as Fannie Mae, marked a turning point. The FHA introduced mortgage insurance, reducing the risk for lenders and thus allowing for longer loan terms and lower down payments, making homeownership more attainable for the average American. Fannie Mae was established to provide a secondary market for mortgages, increasing the availability of funds for lending.

After World War II, these institutions were instrumental in facilitating homeownership for veterans, contributing to a housing boom and sustained growth in homeownership rates. The FHA, in particular, continued to provide critical support to the housing market, especially during economic downturns, helping to stabilize it.

By the early 21st century, a combination of factors led to an all-time high in homeownership, with the rate peaking at 68.1% in 2001. However, this peak was followed by a sharp decline during the financial crisis of 2008. Fannie Mae, severely affected by mortgage defaults, was taken into federal conservatorship to prevent its collapse. After a few years, by 2012, it had recovered to profitability. The FHA also played a significant role in steadying the market by ensuring the availability of mortgage insurance during the crisis.

The Federal Reserve intervened as well, implementing policies aimed at bolstering the market, which helped to restore confidence and stability in mortgage-backed securities. By 2013, these collective efforts had begun to yield a more resilient housing market.

Today, institutions like Fannie Mae and the FHA continue to be foundational to the mortgage industry, providing backing for a substantial portion of mortgages for single-family homes and contributing to the flexibility and accessibility of home financing.