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The Mortgage Calculator helps estimate the monthly payment due along with other financial costs associated with mortgages. There are options to include extra payments or annual percentage increases of common mortgage-related expenses. The calculator is mainly intended for use by U.S. residents.
Mortgages
A mortgage is a loan that is backed by real estate, typically. It is described by lenders as credit taken out to purchase real estate. In essence, the buyer promises to repay the money borrowed over a set length of time—typically 15 or 30 years in the United States—while the lender assists the buyer in paying the home seller. The buyer makes a payment to the lender each month. The original amount borrowed is referred to as the principal and is represented by a portion of the monthly payment. The cost incurred by the lender in using the funds, or interest, makes up the remaining amount.
Escrow accounts may be used to pay for the price of insurance and property taxes. Until the last monthly payment is made, the buyer cannot be regarded as the legal owner of the mortgaged property. The standard 30-year fixed-interest loan, which accounts for 70% to 90% of all mortgages in the United States, is the most popular type of mortgage loan. In the United States, mortgages are the most common method of home ownership.
Mortgage Calculator Components
A mortgage usually includes the following key components. These are also the basic components of a mortgage calculator.
Loan Amount
The amount borrowed from a lender or bank. In a mortgage, this amounts to the purchase price minus any down payment. The maximum loan amount one can borrow normally correlates with household income or affordability. To estimate an affordable amount, please use our House Affordability Calculator.
Down Payment
It denotes the initial payment for the purchase, which is typically a portion of the overall cost. This is the sum of the purchase price that the borrower has paid. Usually, mortgage lenders require a 20% down payment or more from the borrower. Borrowers may occasionally put down as little as 3%. The borrowers will be obliged to pay private mortgage insurance (PMI) if their down payment is less than 20%. As long as the loan balance is above 80% of the home’s initial purchase price, borrowers must maintain this insurance. The bigger the down payment, the more favorable the interest rate and the more probable the loan would be authorized, according to a general rule of thumb.
Loan Term
It is the time frame within which the loan must be fully repaid. The majority of fixed-rate mortgages have periods of 15, 20, or 30 years. A lower interest rate is often included with a shorter time frame, such 15 or 20 years.
Interest Rate
Interest rate is the percentage of the loan charged as a cost of borrowing. Mortgages can charge either fixed-rate mortgages (FRM) or adjustable-rate mortgages (ARM). As the name implies, interest rates remain the same for the term of the FRM loan. The calculator above calculates fixed rates only. For ARMs, interest rates are generally fixed for a period of time, after which they will be periodically adjusted based on market indices. ARMs transfer part of the risk to borrowers. Therefore, the initial interest rates are normally 0.5% to 2% lower than FRM with the same loan term. Mortgage interest rates are normally expressed in Annual Percentage Rate (APR), sometimes called nominal APR or effective APR. It is the interest rate expressed as a periodic rate multiplied by the number of compounding periods in a year. For example, if a mortgage rate is 6% APR, it means the borrower will have to pay 6% divided by twelve, which comes out to 0.5% in interest every month.
Costs Associated with Home Ownership and Mortgages
Monthly mortgage payments usually comprise the bulk of the financial costs associated with owning a house, but there are other substantial costs to keep in mind. These costs are separated into two categories, recurring and non-recurring.
Recurring Costs
Most recurring costs persist throughout and beyond the life of a mortgage. They are a significant financial factor. Property taxes, home insurance, HOA fees, and other costs increase with time as a byproduct of inflation. In the calculator, the recurring costs are under the “Include Options Below” checkbox. There are also optional inputs within the calculator for annual percentage increases under “More Options.” Using these can result in more accurate calculations.
Property taxes
A tax that property owners pay to governing authorities. In the U.S., property tax is usually managed by municipal or county governments. All 50 states impose taxes on property at the local level. The annual real estate tax in the U.S. varies by location; on average, Americans pay about 1.1% of their property’s value as property tax each year.
Home insurance
An insurance policy that protects the owner from accidents that may happen to their real estate properties. Home insurance can also contain personal liability coverage, which protects against lawsuits involving injuries that occur on and off the property. The cost of home insurance varies according to factors such as location, condition of the property, and the coverage amount.
Private mortgage insurance (PMI)
MPI protects the mortgage lender if the borrower is unable to repay the loan. In the U.S. specifically, if the down payment is less than 20% of the property’s value, the lender will normally require the borrower to purchase PMI until the loan-to-value ratio (LTV) reaches 80% or 78%. PMI price varies according to factors such as down payment, size of the loan, and credit of the borrower. The annual cost typically ranges from 0.3% to 1.9% of the loan amount.
HOA fee
A fee imposed on the property owner by a homeowner’s association (HOA), which is an organization that maintains and improves the property and environment of the neighborhoods within its purview. Condominiums, townhomes, and some single-family homes commonly require the payment of HOA fees. Annual HOA fees usually amount to less than one percent of the property value.
Other costs
It includes utilities, home maintenance costs, and anything pertaining to the general upkeep of the property. It is common to spend 1% or more of the property value on annual maintenance alone.
Non-Recurring Costs
These costs aren’t addressed by the calculator, but they are still important to keep in mind.
Closing costs
The fees paid at the closing of a real estate transaction. These are not recurring fees, but they can be expensive. In the U.S., the closing cost on a mortgage can include an attorney fee, the title service cost, recording fee, survey fee, property transfer tax, brokerage commission, mortgage application fee, points, appraisal fee, inspection fee, home warranty, pre-paid home insurance, pro-rata property taxes, pro-rata homeowner association dues, pro-rata interest, and more. These costs typically fall on the buyer, but it is possible to negotiate a “credit” with the seller or the lender. It is not unusual for a buyer to pay about $10,000 in total closing costs on a $400,000 transaction.
Initial renovations
Some buyers choose to renovate before moving in. Examples of renovations include changing the flooring, repainting the walls, updating the kitchen, or even overhauling the entire interior or exterior. While these expenses can add up quickly, renovation costs are optional, and owners may choose not to address renovation issues immediately.
Miscellaneous
New furniture, new appliances, and moving costs are typical non-recurring costs of a home purchase. This also includes repair costs.
Early Repayment and Extra Payments
In many situations, mortgage borrowers may want to pay off mortgages earlier rather than later, either in whole or in part, for reasons including but not limited to interest savings, wanting to sell their home, or refinancing. Our calculator can factor in monthly, annual, or one-time extra payments. However, borrowers need to understand the advantages and disadvantages of paying ahead on the mortgage.
Early Repayment Strategies
Aside from paying off the mortgage loan entirely, typically, there are three main strategies that can be used to repay a mortgage loan earlier. Borrowers mainly adopt these strategies to save on interest. These methods can be used in combination or individually.
Make extra payments
This is simply an extra payment over and above the monthly payment. On typical long-term mortgage loans, a very big portion of the earlier payments will go towards paying down interest rather than the principal. Any extra payments will decrease the loan balance, thereby decreasing interest and allowing the borrower to pay off the loan earlier in the long run. Some people form the habit of paying extra every month, while others pay extra whenever they can. There are optional inputs in the Mortgage Calculator to include many extra payments, and it can be helpful to compare the results of supplementing mortgages with or without extra payments.
Biweekly payments
The borrower pays half the monthly payment every two weeks. With 52 weeks in a year, this amounts to 26 payments or 13 months of mortgage repayments during the year. This method is mainly for those who receive their paycheck biweekly. It is easier for them to form a habit of taking a portion from each paycheck to make mortgage payments. Displayed in the calculated results are biweekly payments for comparison purposes.
Refinance to a loan with a shorter term
Refinancing involves taking out a new loan to pay off an old loan. In employing this strategy, borrowers can shorten the term, typically resulting in a lower interest rate. This can speed up the payoff and save on interest. However, this usually imposes a larger monthly payment on the borrower. Also, a borrower will likely need to pay closing costs and fees when they refinance.
Reasons for early repayment
Making extra payments offers the following advantages:
Lower interest costs
Borrowers can save money on interest, which often amounts to a significant expense.
Shorter repayment period
A shortened repayment period means the payoff will come faster than the original term stated in the mortgage agreement. This results in the borrower paying off the mortgage faster.
Personal satisfaction
The feeling of emotional well-being that can come with freedom from debt obligations. A debt-free status also empowers borrowers to spend and invest in other areas.
Drawbacks of early repayment
However, extra payments also come at a cost. Borrowers should consider the following factors before paying ahead on a mortgage:
Possible prepayment penalties
A prepayment penalty is an agreement, most likely explained in a mortgage contract, between a borrower and a mortgage lender that regulates what the borrower is allowed to pay off and when. Penalty amounts are usually expressed as a percent of the outstanding balance at the time of prepayment or a specified number of months of interest. The penalty amount typically decreases with time until it phases out eventually, normally within 5 years. One-time payoff due to home selling is normally exempt from a prepayment penalty.
Opportunity costs
Paying off a mortgage early may not be ideal since mortgage rates are relatively low compared to other financial rates. For example, paying off a mortgage with a 4% interest rate when a person could potentially make 10% or more by instead investing that money can be a significant opportunity cost.
Capital locked up in the house
Money put into the house is cash that the borrower cannot spend elsewhere. This may ultimately force a borrower to take out an additional loan if an unexpected need for cash arises.
Loss of tax deduction
Borrowers in the U.S. can deduct mortgage interest costs from their taxes. Lower interest payments result in less of a deduction. However, only taxpayers who itemize (rather than taking the standard deduction) can take advantage of this benefit.
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