Mortgage Calculator
The following Mortgage Payment Calculator will help determine your monthly mortgage payments based on home price, down payment, mortgage interest rate, and term of the mortgage. Our calculations include principal, interest, property taxes, homeowner’s insurance, HOA fees, and mortgage insurance premiums (PMI).
Amortization Schedule
What You Should Know
- A mortgage payment consists of the principal, interest, and other additional expenses such as mortgage insurance, property taxes, homeowners insurance, and HOA fees
- Amortization determines how much principal and interest a borrower pays in each periodic payment. Initially, the borrower pays more in interest
- By making bi-weekly instead of monthly payments on your mortgage, you can pay off the mortgage earlier
- The mortgage down payment is the percentage of the home’s price that you have to pay upfront to get a mortgage
- If you put less than a 20% down payment, you have to pay for mortgage insurance
- Mortgage rates can be fixed, where they remain unchanged throughout the loan’s life, or adjustable, where they fluctuate depending on a benchmark index
- The mortgage term is the period of time during which you are required to pay off your mortgage
Mortgage Calculator Calculations
What Costs Does the Monthly Mortgage Payment Include?
Our mortgage calculator provides your total monthly mortgage payment which includes the loan repayment and interest along with other expenses. However, in order to understand how the payment is calculated it is essential to know what the monthly mortgage payment consists of:
- Principal & Interest - the majority of the payment is the repayment of the loan and interest, which is determined by the process of amortization. The principal is the amount that you initially borrowed from the lender, while the interest is the amount the lender charges for letting you borrow the money.
- Additional Costs – Mortgage Insurance (PMI or FHA MIP), property taxes, homeowners insurance, and HOA fees.
How to Calculate the Mortgage Payment?
The first step is to calculate the principal and interest using amortization. Amortization is the process that takes a loan and determines the equal periodic payments that are made to repay the principal and additional interest on the loan. The formula used to calculate the monthly payment using amortization is as follows:
Example: $400,000 Loan Amount
Suppose you are considering taking a $400,000 mortgage to buy a house. A lender offers you a $400,000 mortgage at a 2% fixed interest rate for 30 years, and you would like to calculate the monthly mortgage payments required for this loan.
| Mortgage Principal (P) | $400,000 |
| Mortgage Rate (r) | 2% annual or 0.16% monthly |
| Mortgage Length (n) | 30 years or 360 months |
The following amortization calculation includes both principal repayment and interest. Use our amortization calculator to try more examples and learn more about the amortization process. Additionally, if you have an interest-only compoonent in your mortgage, then try using an interest-only mortgage calculator for a more precise payment schedule.
How to Calculate Mortgage Interest?
The above amortization formula provides both principal and interest, however, interest can be calculated separately also. The following formula is used:
Interest per month = Remaining Mortgage Balance * Mortgage Rate
Interest per month keeps changing as more and more of the loan balance is paid off. Initially, a larger portion of the monthly mortgage payment is interest payment and less principal repayment. As the loan progresses, interest payments are smaller than principal repayment. This can be visually understood using our mortgage interest calculator.
If the mortgage rate is too high for you, you should shop around at different lenders to get the best deal. The next option is to consider mortgage discount points, as discount points can be purchased as part of closing costs to reduce your mortgage rate. 1 discount point costs 1% of the mortgage amount and reduces the mortgage rate by 0.25%. A mortgage discount point calculator can help you determine if this is worth it for you.
How to Calculate A Monthly Mortgage Payment?
The first step of the process as shown above involved the calculation of principal and interest. The second step is to determine the total monthly mortgage payment. This is done by adding mortgage insurance if the minimum down payment is less than 20%, along with property taxes, homeowners insurance, and HOA Fees.
Example: $1,478 Monthly Payment
Principal and Interest Payment = $1,478
Mortgage Insurance = $188
Property Tax = $527
Homeowners Insurance = $192
HOA Fees = $15
Total Monthly Mortgage Payment = $2,400 ($1,478 + $188 + $527 + $192 + $15)
Payment Frequency
Most people usually choose to make monthly mortgage payments. In this payment plan, throughout the course of a year, a borrower would have to make 12 mortgage payments. However, some lenders offer another option, bi-weekly mortgage payments. From the name, it is obvious that a borrower is expected to make a mortgage payment every 2 weeks.
Since one year has approximately 52 weeks, with a bi-weekly mortgage payment plan, one would have to make 26 half-payments throughout the year. These payments are equivalent to 13 monthly mortgage payments. As you can see, with the bi-weekly payment plan, you would have to make one more monthly mortgage payment compared to the monthly payment plan.
The obvious advantage of this payment structure is that by paying more throughout the year, you will get to build equity in your home faster and you will end up paying less in interest overall. However, bi-weekly payments present some pros and cons that need to be taken into consideration and compared to see if the advantages outweigh the disadvantages.
Pros of Bi-Weekly Payments
You can pay off your mortgage faster - The bi-weekly payment plan allows you to make an additional monthly payment towards your mortgage every year. Therefore, you can pay off your mortgage sooner than in the other scenario where you only make 12 monthly payments. For example, imagine that you wish to purchase a $300,000 home and you can afford to make a 20% down payment on your 30-year mortgage with an interest rate of 3%. If you decide to make bi-weekly mortgage payments, then you will be able to pay off your mortgage completely 3 years earlier.
You can save money on interest – By making more frequent payments, you are paying off some of your principal faster. Since interest charged is based on the amount of principal left, then with the bi-weekly payment plan, you will be paying less in interest throughout the life of the mortgage. Taking the example of the $300,000 house, where you make a 20% down payment. The total interest you would pay until the end of the loan with the monthly payment plan totals up to $124,265.89. On the other hand, by making bi-weekly payments, you would pay total interest of $107,131.43 throughout the life of the loan. This means that by making more frequent payments, you can save up to $17,134.46.
You can build equity faster – Every time you make a payment on your mortgage, you are repaying off some of the principal you owe. When you pay off the principal you owe to the lender, you build more equity in your home. Once that portion of the house is paid off, it belongs to you. By using the bi-weekly payment plan, you will make one more payment every year. Therefore, you would be paying off more principal and building equity faster in your home. Building equity in your home has certain advantages like borrowing against that equity through various loans.
Cons of Bi-Weekly Payments
Payment plan arrangement – If the lender doesn’t offer a bi-weekly payment plan, other companies exist that will offer to make this arrangement for you. However, there are certain things to look out for. While the bi-weekly payment plan means that the payments you make every two weeks will be applied to your mortgage, some of the companies that offer the service won’t do exactly this. Instead, after you’ve made your first bi-weekly payment, they will wait for the second one, and then send the total amount to the lender. This means that the payments won’t be applied immediately and that you won’t be saving as much in interest. It simply means that you will just be making one extra payment every year.
Fees for making bi-weekly payments – Since you are saving in interest by making bi-weekly payments instead of monthly, this means that the lenders are losing these interest payments that they would otherwise receive. In order to offset the effect of lost interest, lenders charge fees if you wish to make bi-weekly payments. If your lender doesn’t allow bi-weekly payments and you use a third-party company to set up bi-weekly payments instead, the third-party company may also charge a fee for facilitating your payments.
Budget planning– Depending on your income stream, its frequency, and your monthly bills, the bi-weekly option might prove not to be the best option for your financial situation. You need to determine if you can afford to make the extra payments and if your income allows you to make a payment every two weeks.
Can I Do It Myself?
If your lender does not offer the opportunity to make bi-weekly payments or it offers it at a high cost, you can create your own bi-weekly mortgage plan. A lot of discipline and commitment will be needed on your part to be able to follow a bi-weekly payment plan on your own and get some of its benefits.
First, you can calculate the amount you would pay if you were to make a bi-weekly payment and then pay that amount every two weeks. If the lender applies it to your balance, then you would be able to save some interest, since the principal balance would decrease every two weeks.
The other option is for you to divide your monthly mortgage payment by 12 and set that amount aside each month. These amounts accumulated would be the equivalent of one monthly mortgage payment at the end of the year. At this point, you can make the additional payment at the end of the year to your mortgage and benefit from paying off some of the principal.
Keep in mind that you need to be careful and check if the lender has any prepayment penalties in place. If the lender charges fees for paying some of the principal early, then you might have to reconsider if making an additional payment is really worth it.
Is a Bi-Weekly Mortgage the Same as a Bi-Monthly Mortgage?
The simple answer is no. A bi-monthly mortgage requires you to make two mortgage payments per month. This means that in total, you would be making 24 payments throughout the year. On the other hand, with the bi-weekly payment plan, you make a payment every two weeks, which totals to 26 mortgage payments a year. This means that you get to save more in interest and shorten the time you pay for the loan if you make bi-weekly payments.
Extra Payments
To decrease the amount of interest you pay and to shorten the time during which you are expected to pay off your mortgage, you can make extra payments on your mortgage. These extra payments will decrease the principal left to repay and the interest amount charged on it going forward.
One of the ways that you can make extra payments is through the bi-weekly payment plan that we mentioned earlier. Another way is by making a lump sum payment. Keep in mind that if you want to decrease the amount of interest you pay by making a lump sum payment, you have to notify the lender that you want this amount to be applied to your principal and not your future interest.
If you choose to pay some of the principal earlier, make sure to look out for prepayment penalties. While conventional lenders may charge this type of fee, prepayment penalties are illegal for FHA, VA, and USDA loans.
You can use our Early Mortgage Payment Calculator to find out how much more you will need to pay monthly if you wish to pay off your mortgage in a shorter period of time.
Down Payment
The down payment is the amount that the borrower is required to pay upfront in order to get a mortgage and purchase a house. It is a portion of the house’s price that you have to pay at closing. The minimum down payment most conventional lenders ask for is typically 20% of the house’s price. However, this can change depending on the lender, the type of mortgage you are applying for, and your creditworthiness as a borrower.
What is The Minimum Down Payment That I Have to Make?
Different types of mortgages have different percentages of down payment that they require. The table below summarizes the minimum down payment that you have to make for each type of mortgage:
| Mortgage Type/ Program | Minimum Down Payment |
|---|---|
| Conventional Loans | 3% - 20% |
| Freddie Mac – Home Possible | 3% |
| Fannie Mae - HomeReady | 3% |
| FHA Loans | 10% for a credit score 500 – 579 3.5% for a credit score 580 and above |
| VA Loans | 0% |
| USDA Loans | 0% |
- Conventional Mortgages
Lenders of conventional mortgages typically ask for a 20% down payment. However, there are programs that allow highly creditworthy customers to make less than 20% down payment. These include the Conventional 97 Loan Program, the Home Possible program by Freddie Mac, and the HomeReady program by Fannie Mae.
Keep in mind that even though some types of mortgages allow you to put less than a 20% down payment, they will also require you to pay for Private Mortgage Insurance premiums until you build up 20% equity in your home. These premiums will drive up the monthly payment that you have to make.
- Non-Conventional Mortgages
On the other hand, non-conventional loans are insured by the government. This means that if the borrower defaults on their loan, the government agency will repay the lender for a portion or all of the amount lost. Non-conventional loans include FHA loans, VA loans, and USDA loans.
- FHA loans are backed by the Federal Housing Administration, part of the US Department of Housing and Urban Development. FHA lenders require a 10% down payment if the borrower’s credit score is between 500 and 580 and a 3.5% down payment if the borrower’s credit score is 580 and above. If you put a down payment of less than 20% with FHA loans, you are required to pay for mortgage insurance premiums (MIP).
- VA loans are backed by the Department of Veterans Affairs, and they do not have a minimum down payment. This means that you can qualify for a VA loan even with a 0% down payment. The only exception that exists is in the case that the market value of the home is smaller than the appraised value of the home. In this scenario, the difference would have to be paid as a down payment. The good news is that VA loans don’t require mortgage insurance.
- USDA loans are backed by the US Department of Agriculture. Similar to VA loans, they have no minimum down payment requirement. However, you will have to pay for mortgage insurance in case of a small down payment.
Is it better to put a large down payment?
While the financial circumstances of many, especially first-time homebuyers, might not allow them to make a 20% down payment, there are a number of advantages to saving for a large down payment. Some of these benefits include:
1) Smaller amount borrowed – By making a large down payment, it means that you are paying for 20% of the house’s price yourself. This 20% is the equity that you will immediately own in the house, which gives you certain advantages if you later decide to refinance the mortgage or sell the house in the future.
2) Less interest paid – The interest you pay on a loan depends on the loan balance at the end of each month and your mortgage rate. By making a larger down payment and borrowing less, the outstanding balance will be lower, and the interest you will pay will be lower as well.
3) Better mortgage rates – Borrowers who can afford to make a 20% down payment are seen as more creditworthy and less risky than borrowers who choose to make a smaller down payment. Since they are viewed by the lenders as less risky, lenders typically offer them better mortgage rates.
4) Smaller mortgage payments – The smaller amount borrowed combined with the more favorable mortgage rates makes for a smaller mortgage payment every month. Since the amount owed is smaller, then there is less principal to be repaid. Moreover, the interest rate applied to this amount is lower, which means the mortgage payments will be smaller as well.
5) No mortgage insurance – As we mentioned, if you make a down payment of less than 20% of the house’s price, you will have to pay for mortgage insurance. This mortgage insurance adds to your monthly obligations, making the payment larger. Therefore, saving for a larger down payment of at least 20% can save you money in private mortgage insurance.
Private Mortgage Insurance
If you make a down payment smaller than 20% of the house purchase price, you are required to pay for private mortgage insurance. PMI protects the lender in the event that the borrower does not make the mortgage payments and therefore defaults on their loan. The private mortgage insurance covers some of the losses that the lender experiences in this case.
How much is PMI?
The amount you pay for your private mortgage insurance premiums will depend on the PMI rate, the house price, and the down payment you make. PMI rates typically range from 0.55% to 2.25% of the original loan amount. The rate, however, varies based on the coverage required by the lender, the size of the home loan, your credit score, and the type of mortgage you are applying for.
Do I have to pay PMI for the life of the loan?
The borrower does not need to pay for PMI throughout the whole life of the loan. They only need to pay until they build 20% equity in their home, at which point, they can ask for the PMI to be removed. The PMI should be removed automatically once you reach an LTV ratio of 78% on the loan.
What is the LTV Ratio?
The Loan to Value ratio is the portion of the house’s price that is being financed through the mortgage. The LTV ratio is calculated as the mortgage amount over the house’s price. When one makes a smaller down payment, the mortgage amount needed to purchase the house is larger, and therefore the LTV ratio is higher.
PMI vs MIP
While PMI is used for conventional mortgages, MIP or Mortgage Insurance Premium is used for non-conventional mortgages, such as for FHA loans. MIP typically proves to be more expensive than PMI, because it requires an upfront premium payment of 1.75% of the loan amount and an annual payment of 0.45% - 1.05%. Apart from this, the main difference between MIP and PMI stands in the fact one cannot remove MIP once they reach 20% equity in their homes. For FHA loans, if you make a down payment of at least 10%, you have to pay MIP for 11 years. On the other hand, if you make a down payment of less than 10%, then you have to pay for MIP until the end of the loan’s life.
Mortgage Term
The mortgage term is the period of time throughout which a borrower will pay off their mortgage, and the interest on it. In the U.S., mortgage terms are typically as long as their amortization periods, which is why the terms are used interchangeably.
How long are mortgage terms?
The most common mortgage terms are 30-year and 15-year mortgages. With a 30-year mortgage term, all else the same, your monthly mortgage payment is going to be lower than with a 15-year mortgage term. This happens because, with a 15-year term, you will have to pay the same amount in a shorter period of time, which is why the mortgage payments will have to be larger.
Which Mortgage Term is Right For Me?
There are certain advantages and disadvantages that the two most popular loan terms present. The answer to which one is the right for you will depend on your budget and specific financial circumstances. Some of the key differences between the two terms include:
Mortgage Payment – The monthly payment on a 15-year mortgage will be larger than the monthly mortgage payment for a 30-year mortgage. Therefore, if you are on a tight budget, you might not afford to take on a 15-year mortgage.
Mortgage Rate – Lenders typically charge a higher mortgage rate for a 30-year mortgage than for a 15-year mortgage. The reasoning behind this is that 30-year mortgages are viewed as riskier than 15-year mortgages. Moreover, it will cost the lender more overall to make a longer-term mortgage.
Equity Built – By paying off the mortgage faster, a 15-year mortgage allows a homeowner to build equity faster than a 30-year mortgage. The larger monthly payments come with the benefit of paying off principal faster.
Budget Flexibility – The lower monthly payments that a 30-Year mortgage offers can give one more room to invest or use the rest of the funds for other purposes.
15 vs 30 Year Mortgage Payment
Comparing the monthly payments on a 15-Year vs 30-Year mortgage
Imagine that you want to purchase a house in the state of New York that costs $380,000 and you can afford to make a 20% down payment. The mortgage rate decided by your lender is 3.5%. Your monthly income is $5,000. How much will there be left if you pay off the mortgage in 15 years compared to 30 years?
| 30 – Year | 15 - Year | |
|---|---|---|
| Income | ||
| Monthly Salary | $5,000 | $5,000 |
| Mortgage Expenses | ||
| Principal & Interest | $1,365 | $2,173 |
| Homeownership Costs | ||
| Property Taxes | $542 | $542 |
| Homeowners Insurance | $104 | $104 |
| HOA Fees | $0 | $0 |
| Leftover Funds | ||
| $2,989/month | $2,181/month | |
Mortgage Rates
The interest rate on your mortgage plays a big role in determining how expensive taking out a mortgage to purchase a house will be. The mortgage rate decides how much interest you will have to pay the lender throughout a loan’s life. A higher mortgage rate means higher interest expenses, which is why every borrower should aim for the lowest mortgage rate possible.
What type of mortgage rates are there?
Mortgage rates can be fixed or adjustable. That’s similar to Canadian mortgage rates that can be either “fixed” or “variable”. From the name, fixed-mortgage rates stay unchanged or fixed throughout the life of the mortgage. On the other hand, adjustable mortgage rates depend on a benchmark index, such as the prime rate. They are calculated as the prime rate plus a margin determined by the lender. Therefore, adjustable interest rates change as the prime rate changes. It is important to note that interest rate is not the only factor to consider. If you are buying a property in another state or city, it is important to calculate the cost of living in the location before purchasing a property there.
Which type of mortgage rate should I choose?
Initially, fixed mortgage rates are typically higher than adjustable mortgage rates. However, fixed mortgage rates also give the borrower some certainty on how much their interest will be in the future. On the other hand, while fixed mortgage rates stay unchanged, adjustable mortgage rates come with the possibility of your mortgage rate decreasing in the future. Nonetheless, this can also backfire if interest rates rise, in which case, fixed mortgage rates would be the safer alternative.
Since adjustable mortgage rates are typically lower in the beginning, an adjustable-rate mortgage may be able to qualify the borrower for a higher mortgage amount and therefore the borrower could purchase a more expensive home. Therefore, if you are willing to take on the risk of rising interest rates and want to benefit from the initial lower rates, an adjustable-rate mortgage is right for you.
How are mortgage rates determined?
Mortgage rates are influenced by market economic factors, which are out of your control, and by your specific financial characteristics and creditworthiness as a borrower. A number of factors that affect your mortgage rate include:
- Down Payment – A higher down payment leads to a lower LTV ratio. Having a lower LTV ratio can classify you as a less risky borrower since you were able to pay a big amount of money upfront. Lenders typically give better mortgage rates to less risky borrowers.
- Credit Score – Your riskiness and creditworthiness as a borrower is also determined by looking at your credit score. A high credit score indicates that you have been able to pay your financial obligations as they come due in the past and it affects your creditworthiness positively. Therefore, borrowers with high credit scores may be able to get a lower mortgage rate than others.
- DTI ratio – The debt-to-income ratio shows what portion of your income will be used to cover your monthly debt payments including the payment for the mortgage you are applying for. A low DTI ratio can classify you as a less risky borrower, and therefore can get you better mortgage terms, including a lower mortgage rate.
FHA Mortgage Payments
Calculating your mortgage payment on your FHA loan is similar to calculating the mortgage payment on a regular mortgage. You will need the house’s price, the down payment, the mortgage rate, and the mortgage term for an estimation of your monthly payments. The biggest difference between the two stands in the mortgage insurance that you will have to pay if you put a down payment smaller than 20% of the house’s price.
Upfront mortgage insurance premium – Contrary to a conventional mortgage, with an FHA loan, you will have to pay 1.75% of the loan amount as an upfront mortgage insurance premium. Therefore, for a house costing $200,000, where you have made a 10% down payment, you will have to pay $180,000 * 1.75% = $3,150 as upfront MIP. This amount can either be paid upfront or it can be rolled over into the loan balance. If you choose to go with the second option, then your monthly mortgage payment will increase to account for that.
Annual MIP - The monthly payment you make using an FHA loan is also affected by the annual MIP. The annual MIP rate ranges from 0.45% to 1.05%. While for a conventional loan, you can stop paying for PMI once you reach a 20% down payment, this is not the case for FHA loans.
If you put less than 10% down for an FHA loan, you will have to continue paying for MIP throughout the loan’s life, which means that your monthly payments will include the MIP until you completely pay off the loan. On the other hand, if you put at least 10%, you only have to pay MIP for 11 years. This means that after 11 years, your monthly payment will be smaller as it will not include MIP.
Our FHA Loan Calculator can help you determine your monthly mortgage payment through an FHA loan depending on your specific situation.
VA Mortgage Payments
As with regular mortgages and FHA loans, the same process is used to find the mortgage payment that you have to make if you take a VA loan to purchase a home. There are, however, some characteristics of VA loans that can increase or decrease your monthly payment. These include:
VA Funding Fee – Borrowers of VA loans will typically have to pay around 1.4% to 3.6% of the amount borrowed as a VA funding fee. The exact rate depends on the specific VA loan you are applying for, whether you make a down payment or not, and whether you have used a VA loan in the past. The VA Funding Fee can either be paid upfront or you can choose to roll over the amount into the loan. In the second case, your monthly mortgage payment would increase since the loan balance increases.
No Mortgage Insurance – This is one of the main advantages of VA loans compared to other non-conventional mortgages. Even with a small or no down payment, you won’t have to pay for mortgage insurance or MIP for a VA loan. This means that all else the same, VA loans would offer you a smaller monthly payment.
The VA Loan Calculator can help you determine your monthly mortgage payment through a VA loan depending on your specific situation.
How to Get A Mortgage?
Step 1: Get Approved
Before starting your search for a house, the first step is to get a mortgage pre-approval. The process of getting pre-approved for a mortgage will determine how much a lender is willing to lend you. Based on this amount, you can determine the range of home prices you can afford.
When deciding on how much to lend you, lenders will look at your income, credit history, credit score, assets, and debt. To confirm all of these, lenders will ask for documents that verify your identification, income, and assets. This process is relatively fast and it can take around 3 business days. However, keep in mind that a pre-approval has an expiration date, so if you put off the search for a home for a long time, the pre-approval letter may not be valid anymore and you would have to start the process from the beginning.
Getting pre-approved has many advantages including showing the sellers that you are serious about your offer, having a faster closing process, and saving time in house searching by only looking at options that you can afford.
Step 2: Shop for Houses
Now that you have the pre-approval letter, you can begin your house search. To make the process easier and faster, consider hiring a real estate agent to help you search for your dream home. Through their connections, real estate agents can give you access to houses that might not be easy to find on your own. Moreover, they can save you time by narrowing down the search and looking for houses that meet your specific needs.
Real estate agents can also help you negotiate the price of a home when you make an offer. Having done this before and being knowledgeable of the real estate market, agents might get you a lower house price than you would be able to negotiate on your own.
Step 3: Apply for a Mortgage
After your offer is accepted, you can start your mortgage application. At this point, the lender will need to verify all the necessary details relating to your income, employment, assets, and the details of the property. This process can be faster if you were already pre-approved for a mortgage since some of the documentation has been already collected.
To verify the details of the property, the lender will require an appraisal to assess the value of the home. In case that the appraised value is smaller than the price of the house, the lender will not approve the loan for the house’s price. Therefore, you will have to pay the difference on your own. Furthermore, the lender will check if there are any liens on the home’s title by hiring a title company.
Step 4: Closing
This is the final step in getting a mortgage. During this time, you will have to pay for the down payment agreed upon, other closing costs, and sign the papers of your mortgage agreement. Some of the closing documents you can expect include the closing disclosure, the promissory note, the deed of trust, and the certificate of occupancy. Before signing the documents, make sure to ask questions on any concerns that you have or clarifications that you may need.
Once you sign, you officially become a homeowner!
How to Lower Monthly Mortgage Payments
There are multiple ways an individual may lower their monthly payments, but some ways of decreasing monthly payments may have undesired consequences that should be considered. The following list describes some popular ways to decrease mortgage payments.
- Extend Term
Extending the term of your loan may be one of the easiest ways to lower monthly payments, but this is one of the most expensive ways of achieving lower monthly payments. Extending the term requires refinancing, which means that there will be certain origination costs associated with extending the term of the loan. In addition to that, even though a term extension lowers monthly payments, the borrower will pay more in interest over the time of the loan and will have to incur origination fees at the time of refinancing. This is a very expensive way to lower monthly mortgage payments, and it should be used only if necessary.
- Lower Interest Rates
If the interest rates are falling, a borrower may be able to refinance their mortgage at a lower interest rate. This may provide great savings, especially on mortgages with large principal amounts. Refinancing comes at a cost, which means that there is a tradeoff between saving on interest rates and losing money on origination fees. It is important to find out how much you can save and how much origination fees will cost before making a decision to refinance.
- Remove Private Mortgage Insurance
If your loan-to-value (LTV) ratio is above 80%, your lender may require you to pay for private mortgage insurance. Private mortgage insurance may be very costly, and in some cases, it can double the interest rate a borrower has to pay on a loan. The easiest way to get rid of private mortgage insurance is to decrease your LTV ratio to 80%. It is best to talk to your lender about ways to drop private mortgage insurance as fast as possible. This may be one of the best ways to save money on interest because removing private mortgage insurance does not require any fees that refinancing requires.
Frequently Asked Questions (FAQ)
How much mortgage can I afford on my salary?
How much house you can afford is directly tied to your income level and the amount of debt that you owe. The debt-to-income (DTI) ratio plays a very important role in determining how much house you can afford. The DTI ratio looks at the percentage of your gross monthly income that goes towards monthly debt repayments. For example, if your monthly income is $5,000 and $2,000 goes towards debt payments, your DTI ratio is 40% ($2,000/$5,000).
The general rule of thumb is to get a monthly mortgage payment that will keep your total DTI ratio below 36%. However, government-sponsored programs can go up to 43% and conventional mortgage lenders can even hit a 50% DTI ratio. Therefore, the decision comes down to you, whether you are willing to take on more debt for a pricier home or keep debt low and sacrifice on the home you purchase.
Check out our home affordability calculator to get a better idea of how much house you can afford.
How much can I get pre-approved for?
Once you know what range you can afford, you can reach out to a lender to get pre-approved. Pre-approval is a formal process where you submit documents to a loan officer and receive an actual estimate of how much they could potentially lend you.
Pre-approval is extremely useful in getting an advantage over other buyers as it shows the seller that you have financing available. This can help you during closing and shorten the process for you and the seller of the home. Check out how much you can get pre-approved for using our pre-approval calculator.
Are property taxes included in mortgage payments?
Typically, yes, property taxes are included in the mortgage payments. This happens because if you fail to pay property taxes, then you are likely to default on your loan and your lender will have to pay the remaining property taxes. In order to protect themselves, lenders collect property taxes from their borrowers and pay them on their behalf.
To calculate the property taxes the borrower will have to pay each month, the lender will divide your annual property tax obligation by 12. In the scenario that property taxes end up being higher than what you have paid throughout the year, you will be required to make an extra payment to cover that amount. On the other hand, if you have paid more than your obligation, then you will receive a refund of the difference.
Typically, lenders will put the portion that you pay for your property taxes in an escrow account and then will pay the amount set aside when your property taxes are due. While conventional mortgage lenders are not required to collect property taxes, FHA lenders require all their borrowers to include the property taxes into their mortgage payments.
Should I get a 15-year or 30-year mortgage?
It is essential for you to determine whether you want a shorter mortgage or a longer mortgage. A shorter mortgage results in higher monthly mortgage payments as compared to a longer mortgage where your monthly payments are smaller. However, the trade-off is that in a shorter mortgage, the total interest paid over the life of the loan is smaller than a longer mortgage where more total interest is paid. This can be demonstrated using our 15-year vs 30-year mortgage calculator.
Therefore, you need to decide whether you want larger monthly mortgage payments, but with less total interest paid, or smaller monthly mortgage payments and more total interest paid over the mortgage term.
Should I increase my mortgage payment and pay off my mortgage early?
Early mortgage payoff can be a great way to reduce debt and own your home sooner rather than later. The process involves increasing your monthly mortgage payment to increase principal repayments. As more and more funds are going towards reducing the principal, the interest paid on future payments also reduces, thereby reducing the total interest paid over the life of the loan. There are several restrictions around early mortgage pay-off so be sure to check with your lender if you are allowed to prepay your mortgage.
Do government-insured loans have the same mortgage calculations?
Yes, the manner in which monthly mortgage payments are calculated for conventional loans is the same for government-backed mortgages such as FHA loans, VA loans, and USDA loans.
However, each loan program has different additional payments such as FHA loans that have the FHA Mortgage Insurance Premium (MIP) which is calculated differently than Private Mortgage Insurance (PMI). To determine your FHA mortgage payment, use our FHA loan calculator. VA loans have the VA funding fee, hence, using a VA loan calculator can provide an accurate monthly mortgage payment.
Do refinance mortgage payments have the same mortgage calculations?
Yes, mortgage refinance monthly mortgage payments are calculated the same way as an original mortgage. The payment can change based on the change in length of the mortgage, lower mortgage refinance rates, or if you decide to take out a cash-out refinance. Mortgage refinancing is not free, as it will also include refinancing closing costs.
Will a home equity line of credit (HELOC) increase my mortgage payment?
A HELOC does not increase your monthly mortgage payment as it involves a separate repayment structure. A home equity line of credit (HELOC) allows homeowners to borrow funds from a lender based on the amount of equity they own in the home. Most lenders allow up to 80% of the loan-to-value (LTV) ratio. In order to determine what your HELOC payment will be and how it is repaid, use our HELOC payment calculator.