How to Use The Mortgage Calculator
To use our mortgage calculator, enter your home value, down payment, interest rate, loan term and credit score. You can also select whether you want to include property taxes and homeowners insurance in your calculation.
Here's a closer look at each component of the mortgage calculator:
| Home value | The estimated market value of the home you're interested in buying. |
| Down payment | The amount of money you're putting down upfront towards the purchase of your home. |
| Interest rate | This is the annual interest rate on your loan. |
| Loan term | The length of time, in years, that you'll be making payments on your loan. |
| Credit score | This is a measure of your creditworthiness and is used to determine your interest rate. |
| Loan type | Select whether you are interested in a purchase loan, or a refinance loan. |
| Advanced settings (Taxes & Insurance) | The advanced settings allow you to include property taxes and homeowners insurance in your calculation. These are both important factors in determining your monthly mortgage payment, so we recommend including them if possible. |
Understanding Your Mortgage Payment
Here's a breakdown of key factors that affect your monthly mortgage payment:
- Principal: This is the amount you owe on your mortgage minus the down payment you made. For example, if you purchase a $300,000 house and put down 10%, your principal would be $270,000.
- Interest rate: This is the annual rate your lender charges for borrowing the loan. For example, if your loan amount is $300,000, and your interest rate is 5.5%, you would pay $16,500 in interest for the first year (0.055 x 300,000 = 16,500).
- Property tax: The county where the home is located will dictate your property tax percentage. This cost is split into 12 installments and collected each month with your mortgage payment.
- Mortgage insurance: You will likely have to pay mortgage insurance if your down payment is less than 20%. Lenders want to have protection in case you were to default on the loan. Some mortgages, like the VA home loan, do not have mortgage insurance even though $0 down is required.
- Homeowners insurance: Most lenders will require you to purchase homeowners insurance for the life of the loan. Similar to property tax, the cost will be split into 12 installments and collected with your monthly mortgage payment. Or, you can choose to pay the full 12-month period at once.
- Homeowners association (HOA) fees: If you are buying a home administered by a homeowners organization, you may have to pay a monthly or annual fee to cover improvements to the neighborhood.
How PMI Affects Your Mortgage Payment
PMI is separate from your principal, interest rate, property taxes, and homeowners insurance. It's an extra cost that doesn't reduce your loan balance, but instead protects the lender.
PMI typically ranges from 0.5 to 1.5% of the loan amount per year. So, on a $300,000 loan, that'd be about $1,500 to $4,500 per year.
However, PMI isn't permanent. Once you reach 20% equity in your home, either through your down payment or through loan repayment, you can request to have PMI removed. Some lenders automatically cancel it once you reach 22% equity.
How to Calculate PMI
Private mortgage insurance (PMI) is required on most conventional loans when the borrower makes a down payment of less than 20%. PMI protects the lender in case the borrower defaults on the loan. Typically, the higher your credit score is and the larger your down payment, the lower your PMI rate. Conversely, borrowers with lower credit scores or smaller down payments will have higher PMI rates.
PMI typically ranges from 0.5% to 1.5% of the loan amount per year.
To calculate your monthly PMI payment, multiply your loan amount by your PMI rate, then divide that number by 12. For example:
$300,000 × 0.01 = $3,000 per year
Tips To Lower Your Monthly Mortgage Payment
If you calculate your monthly mortgage payment and it is not as low as you hoped for, there are a few ways you can lower it:
- Lengthen the loan term: If you plan to live in the home for a while, extending your loan term from 15 years to 30 years can help lower your monthly payment. However, you will pay more interest since it is a longer loan term.
- Adjust your homebuying budget: If your monthly mortgage payment is too high, you may want to reconsider how much you can actually afford. This may mean lowering your home purchase budget and finding a home in need of improvements.
- Shop interest rates: It's important to compare different lenders and loan types to have the best chance of securing a low interest rate.
- Work on your credit score: Homebuyers with excellent credit scores are typically offered the best mortgage terms. If your credit score is low, it might be a good idea to work on improving your score before applying for a home loan.
- Increase your down payment: If you can make a higher down payment than what is required, this can be a good way to lower your monthly mortgage payment.
How To Determine Your Homebuying Budget
If you're looking to buy a home, it's important to determine how much mortgage you can afford before beginning the house hunting journey.
The 28/36 percent rule is a general guideline for potential homebuyers to follow. It is recommended that your monthly mortgage payment (including taxes and insurance) is no more than 28% of your gross monthly income, and your total debt (including your mortgage) is no more than 36% of your gross monthly income.
Here's how the 28/36 rule works using an example of earning $5,000 a month:
- 28% of $5,000 = $1,400: Your mortgage payment should be no more than this.
- 36% of $5,000 = $1,800: Your total monthly debt should not exceed this.
Our mortgage calculator can help you determine what kind of home is going to best fit into your budget. Reach out to a First Residential specialist today for more information.