Your Mortgage Calculator: A Clearer Path to Homeownership

The purpose of our Mortgage Calculator is to give you as precise an estimate of your potential monthly housing expense as possible. It is not solely based on the lowest loan payment but is intended for you to also factor in usual other costs, like taxes and insurance. You can even see how paying more or budgeting for annual cost-of-living increases can play out over the life of your loan. Remember, this Calculator is primarily built around the housing market in the United States.

Mortgages

The Loan That Unlocks Your Front Door Essentially, a mortgage is a loan you obtain to purchase a home. The home itself is the collateral if you do not make payments; you are putting up the home as collateral if you do not pay the money back. So, here’s how it works: A lender gives you the funds to buy the home, and you agree to pay that lender back over a certain number of years, typically 15 or 30 years. You owe a value every month that gets broken down into two components:

• Principal: Theamount you are actually bringing down on your loan.

• Interest: The cost you pay the lender to borrow their money.

Frequently, your payment will also include money for an escrow account, which the lender uses to pay your property taxes and homeowners insurance for you. Just remember, while you occupy the home, the lender has an ownership interest in it until you pay that very last payment. For most Americans, the standard way to own a home is through a 30-year fixed-rate mortgage.

Breaking Down the Important Parts of Your Mortgage

To understand your mortgage, and to work with our calculator, you need to know these basic parts: 

•    Loan Amount: This is the overall money you borrow. It is the price of the home minus your down payment. The lender will determine how much they will lend depending mostly on your income and general financial situation.

•    Down Payment: This is your initial investment in the home expressed as a percentage of the purchase price. While putting down 20% is certainly ideal (which helps avoid costly PMI and likely secure a better interest rate), you could also get away with as low as 3% in certain situations.

•    Loan Term: This is the amount of time the loan lasts. A shorter term (like 15 years) will have a much lower interest rate but a higher payment, while extending the loan lifestyle (like 30 years) will spread the cost out over time.

•    Interest Rate: This is the cost of your loan ( or money borrowed). Fixed-rate means your interest rate stays the same for the live of the loan.

Typically our calculator only accounts for this type. Adjustable-rate mortgage (ARM) means you have a lower rate at the start, and then at times it may change, which presents some risk.

 The Real Cost of Homeownership: More Than Just Your Mortgage

Your principal and interest is only the beginning. As a homeowner, there are other substantial, ongoing costs that using our calculator can help you plan for.  Property Taxes: This is an annual tax paid to your local government for your property, typically around 1.1% of your home’s value, but it varies greatly based on where you live. Homeowners Insurance: This is necessary insurance coverage on your property for damages or liability. The price will vary based on the value of your home, location, and insurance coverage. Private Mortgage Insurance (PMI): If your down payment on your mortgage is less than 20% of the value of the home, you will likely have to pay monthly PMI to the lender. This insurance protects the lender in case you default. PMI is typically anywhere from .3% – 1.9% of your loan amount annually. PMI is usually much higher when you are at the lower end of the down payment requirement. PMI often gets eliminated once you have at least 20% equity in the home. HOA Fees: If you live within a managed community, weekly or monthly HOA fees cover a portion of the costs associated with shared amenities and maintenance. Maintenance & Utilities: Maintain a budget for ongoing upkeep of your home (recommended is 1% of the value of your home a year) and monthly utilities.

You should also be prepared for one-time non-recurring costs, which are not built into the calculator: Closing Costs: The home purchase approval and completion costs will happen at closing and can total several thousand dollars. Closing costs vary based on your loan type, the appraisal, title insurance, and sometimes attorney fees.

Initial Move-In Costs: This includes everything from renovations and repairs to new furniture and moving trucks.

Paying Off Your Mortgage Early: The Smart Strategy

Numerous homeowners opt for an early mortgage payoff to save money. We have a calculator that can show you the effects of various plans.

How to Pay Off Early:

   Make Extra Payments: Even a small addition to your monthly payment will make a great reduction to the loan principal, ultimately saving you thousands in interest payments and shortening your mortgage term.

   Move to Biweekly Payments: Instead of making one monthly payment for your mortgage, you would pay half every two weeks. This allows you to pay 13 full mortgage payments rather than 12 in one calendar year. Thus, you could pay off your mortgage faster than before.

   Refinance to a Shorter Term: You can replace your existing mortgage with a newer mortgage that is shorter than the current one. For example, you can refinance from a 30-year mortgage to a 15-year mortgage rather than keeping your 30-year mortgage.

The Benefits of Paying Off Early:

Big Interest Savings: Saving tens of Thousands of dollars in interest payments is the obvious benefit.

Get Debt Free Faster: Think of the sense of accomplishment and peace of mind to own your home outright, in far less time than you had planned to do so.

Peace of Mind: Paying off one major debt can relieve tension and worry from your life.

Factors Before Prepaying Your Mortgage:

Prepayment Penalties: Certain mortgages impose a fine for paying off the loan prematurely. Always read your mortgage contract – it’s generally considered bad practice to pay for loans prepaid.

Opportunity Cost: Extra cash could potentially yield an increased return if you allocated it in another market, especially if your mortgage has an ultra-low interest rate.

Loss of liquidity: Once you allocate extra cash toward your house, it can’t easily be reallocated to other emergencies or opportunities.

Lost tax deduction: In the United States you can deduct mortgage interest when you itemize taxes. Prepaying the loan limits this tax deduction (although the standard deduction is higher for most).

A Brief Historical Perspective: The American Mortgage

Mortgages as they exist today are a relatively new concept. Before 1934, purchasing a home was typically difficult. It required a 50% down payment, with a term of 3-to-5 years, which was often due at once in a large “balloon payment” in the last month of the term that many borrowers could not pay. This broke down when it was too much of a risk during the Great Depression.

To react to this instability, the U.S. government created lending institutions, such as the Federal Housing Administration (FHA) and Fannie Mae, in the 1930s. These institutions innovated the 30-year fixed-rate loan with a much lower down payment that allowed the average American a shot at homeownership. This innovation sparked the housing boom post-World War II, has evolved, and has played a major stabilizing ability during times of financial crisis, like in 2008.