Calculating Your Mortgage
Buying a home is probably one of the most significant financial decisions you would have to make. Understanding the numbers behind your mortgage works enables you to make better financial decisions. Just like any loan application, you have to scrutinize the numbers and percentages unless you would run into a financial impasse.
One thing you have to take cognisance of is that when making your monthly mortgage payment, you’re not just paying off the price of the home. Your payment includes principal, interest, taxes, and insurance – plus a few extra costs. People tend to overlook these costs and focus on the monthly payment when drawing up budgets, which can lead to surprises.
Why You Need To Calculate Your Mortgage
Knowing how to calculate your mortgage can help you make appropriate decisions when considering a home. If you do calculate manually or use tools, calculating your mortgage, bring clarity to judgments affecting your financial decisions, and puts into context how much impact the mortgage would have on your present financial status.
Some issues it helps you clarify are:
1. To Know If The Loan Is Affordable
Knowing how to calculate your mortgage enables you to answer a crucial question: how much house can I afford? Before applying for a mortgage, it is necessary to have a review of your income and monthly expenses. This clarifies your financial standing and liquidity in terms of how much you can afford to part with monthly as mortgage payment. Lenders generally offer the largest loan you are qualified for using based on their standards for an acceptable debt-to-income ratio. However, borrowing less than the maximum available is an indication of good financial acumen. This gives some you wiggle room each month in case you need to take care of other emergencies.
2. To Know How Much Of The House You Own
Of course, the house is yours— that’s until it’s fully paid for. Until then, the lender has an interest, or a lien, on the property. As such, it is important to understand how much home equity you control. You can get this value by subtracting your outstanding loan balance from the current market value of ‘your’ home. The ratio between these two variables is known as your loan-to-value (LTV) ratio. This is what lenders use to estimate how much loan you qualify for. LTV ratio is also useful if you want to borrow against your home using second mortgages and home equity lines of credit (HELOCs).
3. To Have A Clearer Picture
Calculating your mortgage also helps you keep your spending in check. It gives you a wakeup call on how much you can pay each month, especially when other costs and taxes are considered. It also prevents you from putting in too little money, especially when you can get minimum down payments as low as 3%.
4. To Figure Out Ways TO Reduce Payments & Interests
Calculating your mortgage helps you figure out a way to reduce your payments and interests. It lets you know how far you can stretch the tenure of the loan without hurting your balance sheet.
How to Calculate Monthly Mortgage Payments Manually.
It’s also possible to estimate a mortgage payment by hand by using the following formula to find the principal and interest:
M = P[r(1+r)^n/((1+r)^n)-1)].
M = Monthly mortgage payment.
P = Principal loan amount.
r = Interest rate
n = Number of monthly payments
You buy a property priced at $150,000 and make a 10% ($15,000) down payment for a 30-year fixed-rate mortgage with at 4% interest rate.
Using the formula : M = P[r(1+r)^n/((1+r)^n)-1)].
P = $135,000
r = 0.003333
n = 360
When the figures are plugged in:
M = $135,000[0.003333(1+0.003333)^360/((1+0.003333)^360)-1]
M = $135,000[0.00477392237]
M = $644.48
You can always cross-check your final figure using a Loan Amortization Calculator spreadsheet.
What Does A Mortgage Payment Include
There are various costs which coalesce to form your mortgage. The individual costs all impact on your monthly payments. These are:
- Principal: This is the amount you borrowed. You could refer to it as the initial capital. Whenever you make a payment, it reduces the principal you owe.
- Interest: This is what you are charged for borrowing money. Interest rates are expressed as an annual percentage and can be calculated monthly.
- Property taxes: This is tax paid on your property and land to the government. This is included in your monthly mortgage payment, which your service provider saves in an escrow account and remits to the government when the taxes are due.
- Homeowners insurance: Mortgages come with insurance policies which cover damages to your home, or injury on the property. This is also included in your monthly mortgage payment which afterwards is remitted to the government by your loan service provider when due.
- Private Mortgage Insurance: If you make a down payment of less than 20% of the home’s value, you’ll be required to pay mortgage insurance. This protects the lender’s interest against defaults on the mortgage by the borrower. Once you own 20% home equity, the mortgage insurance is cancelled, unless you have an FHA loan.
You can calculate your mortgage payment by simply using an online calculator. However, if you love to crunch numbers and want to see how all of the variables work on the fly, you can do this manually using the mortgage monthly payment formula.
Trump Down Your Monthly Payment With These Strategies
There are specific ways you can reduce your monthly payments on mortgages
1. Reduce The Term
It pays to put the big picture in perspective. While it is good to keep an eye on monthly payments, you should not also lose sight of what the cost would amount to in years. A longer-term loan such as (30-year loans) would make your monthly payment lower, but you’ll pay more interest over the years. Choosing a shorter-term loan (15 years instead of 30 years, for example) to speed up your debt repayment. Loans that are short-termed like 15-year mortgages often have lower rates. You may pay bigger instalments monthly, but you would spend less on interest and overall amount. Plus you reduce the time it takes you to own the home.
2. Buy Less House
You can also reduce your monthly payment by going for a cheaper house. A cheaper house means a smaller loan, which invariably implies less interest to pay.
3. Make A Larger Down Payment
Making a larger down payment reduces your interest rate. Your down payment determines your loan deficit on, which is then used to calculate your monthly instalment when the interest and other costs are factored in. A large down payment reduces the deficit, which reduces your monthly instalments. Also, large down payments help you avoid paying for Private Mortgage Insurance too. That means a lower monthly mortgage payment. A down payment of 20% or more, means you have at least 20% equity in the home and lets you avoid PMI when you refinance.
4. Pay Extra Each Month
You can also reduce your mortgage payments when you make extra payments each month. Each time you make an extra payment on your mortgage, it reduces to your principal balance. However, it is advisable you check with your company first before making any extra payments. Some companies only accept extra payments at specific times. Moreso, they may charge prepayment penalties. When making an extra payment, you can include a note that you want it applied to the principal balance, not the following month’s payment.
5. When Can Your Monthly Payment Go Up?
When Can Your Monthly Payment Go Up?
Mortgage payment schedules are not cast in gold but reflect the prevailing economic conditions. There are certain times which your mortgage payments can increase:
A mortgage loan is a huge financial decision, and as such, requires proper planning and execution. This starts with the type of knowledge you are armed with. You can begin by gathering information on how to calculate your payments and understand other aspects of the loan such as annual interest rate, number of years, type of loan (fixed-rate, interest-only, adjustable), and market value of the home.