If you’re in the market for a home, you can use a mortgage calculator to estimate your budget and to see how factors such as interest rates and repayment terms can affect your monthly payment. A mortgage calculator can be a helpful tool as you ready your finances to apply for a home loan.
What you’ll learn here:
- Why should you do the math before choosing a mortgage?
- What can online mortgage calculators show you?
- How can you use a mortgage calculator?
- How much house can you afford?
Why Should You Do the Math Before Choosing a Mortgage?
Looking at homes without a clear sense of what you can afford makes little sense. Start your research with a mortgage calculator, and then sit down with a mortgage professional who can provide a more detailed analysis.
You’ll need to know what a comfortable monthly payment is before you set your heart on a certain price range of homes, says Josh Lyon, vice president and mortgage loan officer at Colorado’s Motto Mortgage Innovations.
“The last thing any future homebuyer wants to do is get into a home they cannot afford,” Lyon says. “There is a difference between what you qualify for and what you can afford.”
What Can Online Mortgage Calculators Show You?
Mortgage calculators will give you an idea of your monthly mortgage payment based on home price, down payment amount and interest rate. But understanding where all of those numbers come from is important.
“Behind every only mortgage calculator is an algorithm that takes a number of factors into account to give you loan analysis,” says Anna DeSimone, author of “Housing Finance 2020.”
A mortgage calculator lets you see how your finances stack up, mainly relying on these inputs from you:
- Down payment amount. The size of your down payment can affect not only your interest rate but also your mortgage payment. A bigger down payment reduces the lender’s risk, which can result in a lower interest rate. It also means you borrow less and pay a smaller monthly loan payment than if you put little to no money down. If you make a down payment of less than 20%, you will probably have to pay for private mortgage insurance.
- Location. The calculator will pull in real estate data to determine approximate taxes and insurance costs for your county. Some calculators may automatically know this if you have enabled location services.
- Gross annual income. This is the amount of money you earn in one year before taxes. If you are self-employed rather than salaried, lenders usually require two years of federal tax returns. When that’s the case, the best number to put down is your taxable income, DeSimone says.
- Credit status or interest rate. Some calculators may ask for your credit score range, which will generate an estimated interest rate for you. You might also be prompted to key in an interest rate you think you might qualify for.
Once you enter this information into the calculator, it will show you a monthly payment for a given loan amount.
Playing with the numbers can be a helpful exercise, Lyon says. “Online mortgage calculators can show the big difference in payment based upon your interest rate,” he says. “Even a quarter percent can be the difference in pushing the monthly payment out of a homebuyer’s comfort zone.”
This might be just the push you need to improve your credit score and qualify for better rates.
Mortgage calculators can also reveal how putting down an extra few thousand dollars may not drop your monthly payment as much as you might think. Buyers may want to weigh the pros and cons of low-down-payment mortgage options.
What Is the Most Accurate Mortgage Calculator?
The accuracy of any calculator you use depends on the accuracy of the data you input. That said, calculators work best for buyers who don’t have complex finances and can input numbers that reflect their reality.
Most mortgage calculators are set up in a similar way – and you could be working with a lot of estimates, Lyon says. These may include monthly income, monthly debt, monthly homeowners insurance, home price, down payment, interest rate, mortgage insurance and tax payments.
A mortgage calculator may produce more reliable results for buyers who earn salaries, have good credit and carry little debt than for others, DeSimone says. Someone with a fluctuating or nontraditional income, large debt load, or low credit score could be better served by speaking with a housing counselor, who can create a more customized analysis.
How Can You Use a Mortgage Calculator?
A mortgage calculator can help you figure out the maximum principal and interest payments you can afford.
Try this simple hack from DeSimone to compute that amount: “Find a mortgage calculator online, and enter in $100,000 at the current rate, rounded, such as 3.5%. The answer for a 30-year term will be $449.”
This means that for every $1,000 you borrow, you will pay about $4.50 in interest. That interest amount is known as the monthly payment factor.
Once you have the monthly payment factor, you can reverse-engineer the calculation for any home loan, DeSimone says. A $200,000 house financed at 3.5% for 30 years would have a monthly payment of $898, excluding down payment, insurance costs, property taxes and fees.
This exercise can help you determine how well a payment will fit into your budget. Generally, you shouldn’t spend more than 30% of your income on debt, including your mortgage. Using the previous example, you would need an annual income of about $36,000 and no debts to stick to the 30% rule.
How Much House Can I Afford?
A mortgage calculator can give you an idea of how much house you can buy. Maybe you’ve begun to browse homes priced between $350,000 and $500,000 and are wondering whether you can afford the top of that price range.
Principal and interest alone for a $350,000 30-year conventional mortgage at a fixed rate of 3.5% is estimated at about $1,570 monthly. The same type of loan bumped up to $500,000 results in principal and interest payments of about $2,245.
Your down payment can lower monthly principal and interest payments, but you’ll also need to budget for property taxes and homeowners insurance premiums, which you might pay with your mortgage.
You could try estimating your taxes by looking online to find the average tax rate for your county. Insurance is a bit trickier because cost varies widely by location, but obtaining insurance rate quotes online is easy.
Unfortunately, a mortgage calculator can’t answer questions about how much house you can get for precise dollar amounts. You won’t know what to buy for a $1,000 mortgage payment.
“There are a lot more factors that go into qualifying for a mortgage loan than just loan amount, including the interest rate, taxes, homeowners insurance and potential mortgage insurance,” Lyon says. “A payment of $1,000 per month can truly vary from client scenario to client scenario.”
In fact, just the interest rate alone will depend on a number of criteria including but not limited to credit score, loan program, down payment amount and debt-to-income ratio. Of course, you can use a mortgage calculator to plug in higher or lower rates, or to adjust your down payment, to see how your payment changes.
“It is important to note that this amount is an estimate and contingent on numerous individual factors, including APR,” Lyon says. “Every person’s scenario is different.”
What Are the Next Steps After Using a Mortgage Calculator?
Take a good, hard look at your budget. Make sure that you’ve accounted for all of your monthly expenses, with room to spare.
You’ll need to consider different loan program criteria, such as down payments, savings and credit requirements. Don’t forget closing costs, which are typically 2% to 5% of the home purchase price. You’ll also want to leave yourself a savings cushion for home maintenance as well as repairs.
A mortgage calculator can help you set a budget before you begin to look at – and fall in love with – homes you can’t afford. You can start on your own with a calculator and then speak to a mortgage professional for further guidance.
Whatever you do, don’t go it alone. “One of the worst parts of my job is breaking the news that a potential homebuyer may need to alter their homebuying expectations,” Lyon says.
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