Choosing the right mortgage is a critical part of buying a home. Even if a lender gives you a green light to borrow a certain amount, that amount might not fit your budget. Though you might qualify for a large loan, you need to ask yourself whether buying a certain house is worth forgoing eating out, taking vacations, buying the cars you like and an assortment of other lifestyle expenditures.
The best way to see what borrowing will do to your cashflow is to put your numbers in a mortgage calculator like the one we provide here. Owning your dream home is wonderful, but the dream might be a nightmare if you don’t have money left over for other things that add to your life.
The InCharge calculator asks you about key factors that impact your monthly payment. They include:
- Loan amount
- Annual interest on the mortgage loan
- Number of months to pay off the loan
- Price of the home
- Information about taxes and insurance costs
Here’s a brief primer on what information to enter and why it matters:
Mortgage Loan Amount
This is the total amount you plan to borrow, which is the cost of the property less the down payment you make. If a house costs $250,000 and you put down $50,000, you want to borrow $200,000. Remember, these aren’t the only costs involved in buying a home. You also pay closing costs – fees associated with the purchase that include money for an appraisal, home inspection and lender surcharges. These are called points, but they are upfront charges, meaning they usually aren’t built into your loan.
Mortgage Interest Rate
Mortgage lenders don’t just advance you enough to buy a property and let you pay them back. They charge interest on the loan, which is how they make their money. Interest rates are constantly changing, and they vary according to who you borrow the money from, how long you will take to repay it and what sort of loan it is. Fixed rate mortgages, the choice for 90% of buyers, come with an interest rate that doesn’t change during the duration of the loan. If you borrow $200,000 for 30 years at a fixed rate of 4%, your monthly payment will remain constant, but the portion you pay each month for principal and interest will change every month as the loan is closer to beingpaid off. Other loans, called variable rate or adjustable mortgages, have interest rates that can change during repayment. These are popular when interest rates are high, because they usually charge less interest than fixed rate loans until they adjust at some point during the repayment period.
Number of Months to Repay the Loan
This is the maximum amount of time to repay the loan. Fixed rate mortgages usually have either 15- or 30-year repayment schedules. Interest on 30-year loans is usually higher than on 15-year ones because the longer the repayment period, the more risk the lender takes that interest rates might rise. Enter the number of months you’ll take to repay the loan. Most loans can be repaid more quickly by adding extra principal to your monthly payment, but this calculator will tell you what the loan will cost if you make the required payment during the original length of the loan.
The Amortization Schedule
Amortization is the process of paying off a loan. Mortgages are usually paid monthly, and each payment is composed of interest and principal. As the loan is paid off, the amount of interest paid declines and the amount of principal increases. Fixed rate mortgages come with interest rates that never change, so naturally the amount of interest decreases as a function of the principal balance. The desired amortization feature included in this tool allows you to see how the loan will be paid off over time. Choosing yearly will generate a chart that shows the total annual principal and interest that will be paid each year over the course of the mortgage. A monthly chart will show what each payment will be by month, again for the duration of the loan. These amounts will change if you make extra payments.
Don’t Forget Taxes, Insurance and Mortgage Insurance
You will have to pay taxes and insurance on your property, amounts that will change from year to year. Typically, mortgage lenders collect money for taxes and insurance in your monthly mortgage statement, estimating what they expect they’ll cost. The money collected is held in an escrow account which the lender uses to pay these bills. Lenders want to control tax and insurance payments because their money is at risk. They want to make sure your dwelling is insured if the property burns down, flies into pieces in a tornado or suffers some other sort of damage. Failure to pay taxes can result in seizure of the property, which would mean a big loss for you and your lender. Obviously, lenders want to safeguard against that too.
Finally, lenders want to protect themselves against a loan default. If you make a small down payment on the home, typically less than 20% of the purchase price, the lender will require you to purchase private mortgage insurance, known by the acronym PMI. Should you default on your mortgage, mortgage insurance protects the lender by covering what you owe. It also protects you, since a default won’t result in a foreclosure, which can be costly and damages your credit. Typically, when you have 80% equity in in your home, you can cancel your PMI. Generally, if you want to avoid this extra cost, you should make a down payment of 20% or more.
Why Use a Calculator?
Using this calculator will help you compare different mortgages. Rates vary from lender to lender, so do repayment periods. Plugging in the numbers will allow you to see what a mortgage will cost over time. It is up to you to decide which loan works best. Simply because a lender will finance your purchase doesn’t mean it will work for you. The calculator will tell you what to expect.