Could a Mortgage Calculator Lead You to Your Dream Home?
Buying a home is no easy process, especially if you’re a first-time home buyer. You have to find financing, take on a mortgage, and start budgeting differently. And a mortgage calculator can help you figure out just how much you can afford on your dream home.
If you’re thinking about buying a home and taking on a mortgage, here’s what you need to know about mortgages, from how they’re calculated to how you can save money.
How Mortgages Are Calculated
Calculating a mortgage requires financial knowledge, an understanding of how mortgages work, and a bit of math. Getting a mortgage isn’t as simple as signing on the dotted line for a loan – you’ll need to know if you can afford the monthly payments, how long your mortgage will last, and if you even qualify for a mortgage.
When it comes down to the details of just how much your mortgage will cost, you’ll want to focus on the monthly payments you’ll be responsible for. There’s a special formula used to calculate mortgage payments. According to NerdWallet, the official calculation used for mortgage payments is: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1].
To the average person, that formula looks extremely complex. When broken down, the formula for figuring out monthly mortgage payments isn’t much simpler. The equation includes:
- M as your monthly mortgage payment
- P as the principal, or total loan amount
- i as the monthly interest rate
- n as the number of payments you’ll make over the loan’s lifetime
Even when broken down, this formula isn’t easy for anyone who’s not a math expert to figure out. That’s why most homebuyers need some help figuring out just what their monthly mortgage payment will be, and the kinds of mortgages they can afford.
That’s where a mortgage calculator can help. Without doing the complex calculations yourself and making a mistake along the way, a mortgage calculator can effortlessly determine just how much you’ll be paying per month with any kind of mortgage.
The Types of Mortgages
In order to buy a home, you’ll need to qualify for a mortgage. Sometimes simply called a home loan, the type of mortgage you qualify for determines your monthly payment, your interest rate, and the home prices within your budget.
That’s why it’s important to know which types of mortgages are best for different homebuyers. Your mortgage will determine whether or not your dream home is within reach.
Here are the most common types of mortgages, according to Bankrate:
1. Conventional Mortgage
A conventional mortgage is, simply put, a regular mortgage. Homebuyers secure conventional mortgages from any lender, and the loan can be used on a home or property of any kind. Conventional mortgages aren’t insured by the federal government; they’re backed by private lenders. Generally, conventional mortgages require homebuyers to put 20 percent down on their purchase.
2. Jumbo Mortgage
A jumbo mortgage is a home loan that doesn’t abide by federal loan limits. Each year the Federal Housing Finance Agency sets a maximum loan limit for homes in the U.S., accounting for both average and high-cost areas. Jumbo loans allow homebuyers to borrow more money, giving you more cash to buy a more expensive home or a home in a more expensive area.
3. Government Insured Mortgage
If you’ve served the U.S. government, you could be eligible for special government-insured mortgages. While the U.S. government doesn’t lend money to just anyone, those who qualify can take advantage of some very helpful mortgage options.
There are three types of government-insured home loans offered:
- FHA loans, which only require a down payment of 3.5 percent.
- USDA loans, which help middle- to low-income homebuyers purchase homes in rural areas. You must buy a home in an eligible town and meet income requirements.
- VA loans, which are offered to active duty military, veterans, and their families. A VA loan comes with capped costs and don’t require a down payment.
All of these government-insured loans are available to first-time and repeat home buyers, as long as you meet the qualifications and requirements. These mortgages can help you qualify for a home even if you don’t qualify for a conventional mortgage, making it easier to afford a house.
4. Fixed-Rate Mortgage
A fixed-rate mortgage comes with one big difference from other mortgages: the interest rate on your loan never changes. For the entire life of your mortgage, your interest rate remains the same, meaning your monthly payment never changes as well. This type of mortgage makes it incredibly easy to budget for your mortgage and is much more predictable.
5. Adjustable-Rate Mortgage
Adjustable-rate mortgages are the exact opposite of fixed-rate mortgages. These loans fluctuate, as the interest rate increases and decreases based on the current market. This means your mortgage payments can change from month to month, making your payments unpredictable.
Why You Should Use a Mortgage Calculator
Are you wondering how you’ll afford a home, or if you can even fit a mortgage into your budget? You can easily find out by using a mortgage calculator.
A mortgage calculator can help you determine how much you’d like to spend on a home – and it can also help you determine what homes are within in your budget.
Using a mortgage calculator to see just how much you’d have to pay for the home of your dreams is a smart move. Calculating your costs before buying will help you determine which types of mortgages to consider, how much of a down payment you’ll want to have, and how you’ll budget for your monthly payment. And a free mortgage calculator can even estimate your interest rate, your closing costs, your mortgage insurance, and any taxes you’ll have to pay.
Without a mortgage calculator, you could wind up paying – or needing – far more money than you expect. Keep yourself in the know, and keep more money in your pocket, by doing your homework before buying a home. Use a mortgage calculator to determine just how much you can afford, and how you could possibly save.