Your total monthly payment
For many people, getting on the property ladder is one of the most exciting prospects you wish for. As exciting as it is, it can also be nerve-racking, especially when trying to figure out how much it is going to cost, how it all works, and what documents you need. To say that buying a home is expensive, would be quite the understatement – but when done right it works out better than renting. It is an investment for life and in reality, buying a home is almost certainly going to be one of the biggest financial commitments of your entire life (besides that 150 feet yacht you will purchase during your mid-life crisis :). Or of course your kids…).
One of the biggest concerns that potential property buyers have, is the house payments. In order to purchase a house, unless you are very fortunate, you will almost certainly have to take out a loan in the form of a mortgage. Mortgage payment calculation gives buyers quite the headache by not knowing where to start and not knowing how much a mortgage might be. Keeping up with your monthly mortgage payments is of course vital, otherwise you will lose your home – it’s that simple.
This is where mortgage calculators come into the mix. If you want to work out how much your mortgage is going to cost, a mortgage calculator is one of the best tools that you could use. Here’s a look at what they are, how they work, and why they’re so beneficial.
What exactly is a mortgage calculator?
Despite the fact that we’re now incredibly technologically advanced, mortgage calculators, which are based on a simple formula, are actually still fairly basic.
Put very simply, a mortgage calculator is an online tool that is designed to figure out how much your mortgage payments are going to cost each month. Not only that, but it can also factor in other expenses too, such as property taxes, home insurance, principal and interest, and Homeowners Association fees. However, not all mortgage calculators do that, which is why we recommend using one that does. These are known as PITI mortgage calculators as this stands for: Principal, Interest, Taxes, and Insurance. Some tools may also calculate things like private mortgage insurance, or PMI.
How do mortgage calculators work?
Mortgage calculators work by taking information, entered by you, about your property/potential property. Usually, you will be required to enter the price of the property, and then the total amount of down payment that you are making. Once you do this, the calculator will then display on screen how much your monthly mortgage payments are going to be based upon the type of loan that you take out (for example, a 30-year fixed loan term). This figure then gives you a rough idea of how much your mortgage repayments are going to be each month. Some calculators now take into account things such as HOA fees, PMI, home insurance, and so on. This is very useful because it gives you a much clearer idea of how much your house payments are going to cost each month.
Calculating monthly mortgage payments on paper
Despite the fact that online mortgage calculators are designed to make the calculation of your mortgage repayments a piece of cake, you never know when modern technology will let you down. Sometimes, it pays off to take more of an old school approach to things, and that includes working out sums and equations. If you’d rather do the formula on paper, here’s what you need to know:
- M – Monthly mortgage payment
- P – Your principal amount
- I – This is your monthly interest rate. Most likely is that the lender will list the interest rate as an annual figure, in which case you should divide by 12, as this represents each month of the year. As an example, if your interest rate is 5%, your monthly rate will look something like: 0.5/12 = 0.004167
- N – This is the total number of payments required for the duration of the loan itself. So, if you take out a 30-year fixed rate mortgage this would look like: N = 30, years x 12 months each year, for a total of 360 payments in total.
The calculation itself, will look something like:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Piece of cake isn’t it? 🙂
Why use a mortgage calculator?
In this section, we’re going to talk to you about the benefits associated with using a mortgage calculator. These include, but are by no means limited to, the following:
No nasty surprises – Some of the more basic mortgage calculators out there will only tell you how much your mortgage repayments will cost. They don’t factor in other expenses such as home insurance, property taxes, and so on. If you choose a PITI mortgage calculator, though, you’ll find that they tell you much more about what you can expect to spend each month, so you can get an accurate idea of precisely how much you will be spending on paying back and running your home each month.
Know your limits – Sometimes, when it comes to property, we let our hearts rule our heads. If you see a home that you have really fallen in love with, you need to know whether or not you can truly afford it. If you let your heart rule your head, you may find that you take on a property that, realistically, you can’t afford. After the novelty has worn off and you find yourself in debt, struggling to keep up with the house payments each month, you’ll have no choice but to downsize. A mortgage calculator tells you how much it is going to cost you and you can then look at your finances and determine whether or not you can actually afford it.
Save time – If you feel so inclined, you could always work out how much your house payments each month will be on paper using the formula we’ve listed above. If math isn’t your strong suit, or if you just want to save time in the process, a mortgage calculator is ideal. Assuming that you know how much the property costs, and how much down payment you can afford to put down, that’s pretty much the only info you need to enter. Once you enter it, the calculator itself does the work in milliseconds and displays the numbers for you clearly on screen.
Things to consider
We’ll finish up by looking at a few things to consider when it comes to potentially getting a mortgage. These include:
Down payment – First up, arguably the most important consideration is the down payment. This is what you pay up front to act as a deposit on the property you wish to mortgage. Usually, the larger the down payment, the smaller the mortgage will be. Typically, this payment will be between 5% and 10% of the total price of the property.
DTI – The DTI or Debt to Income ratio is also a very important consideration. You see, when getting a mortgage, your prospective lenders won’t just want to know your average income, they’ll also want to know how much debt you have. The more debt you have, the less disposable income you’ll have, the more wary the potential lenders will be.
Disposable income – Finally, we have disposable income. This is income that is left over to “play around with” once all of your bills and debts have been paid off. The more disposable income you have, the greater your chances of landing an impressive mortgage because this shows the lenders that you will be more likely to be able to keep up with your mortgage payments.
Start chatting with Lucy, your 24/7 assistant and we will get working on letting you know your requirements for approval.