# Mortgage Calculator

## How to use this mortgage calculator

This mortgage payment calculator will help you find the cost of homeownership at today’s mortgage rates, accounting for principal, interest, taxes, homeowners insurance, and, where applicable, homeowners association fees.

You should adjust the default values of the mortgage calculator, including mortgage rate and length of loan, to reflect your current situation.

You can use the mortgage payment calculator in three ways:

1. To find the monthly mortgage payment on a home, given current mortgage rates and a specific home purchase price
2. To find out how much house you can afford based on your annual household income
3. To find out how much house you can afford based on your monthly budget

## How to lower your monthly payments

If your mortgage calculator results are not yielding the lower monthly payments you hoped for, here are several techniques to try:

• Lower purchase price: The less you borrow, the lower your mortgage payment
• Bigger down payment: Putting more money down means you’ll borrow less. Also, the best mortgage rates generally go to borrowers with larger down payments, among other qualifying factors
• Avoid private mortgage insurance: When you put at least 20% down on a conventional loan — or 20% home equity on a refinance — you can avoid paying monthly private mortgage insurance premiums (PMI)
• Longer loan term: A longer loan term means lower monthly payments. However, you will pay more in total interest over the life of the loan
• Shop for a lower rate: Rate shopping doesn’t have to take long, and it’s well worth the savings. Here are tips to get your best mortgage rate

## What’s included in a mortgage payment?

Your mortgage payment consists of four costs, which loan officers refer to as ‘PITI.’ These four parts are principal, interest, taxes, and insurance.

• (P) Principal: The amount you owe without any interest added. If you buy a home for \$400,000 with 20% down, then your principal loan balance is \$320,000
• (I) Interest: The amount of interest you’ll pay to borrow the principal. If the same \$320,000 loan above has a 4% rate, then you’ll pay \$12,800 for the first year in interest repayment
• (T) Taxes: Property taxes required by your city and county government
• (I) Insurance: Homeowners insurance and, if required, private mortgage insurance premiums (PMI) on a conventional loan

When determining your home buying budget, consider your entire PITI payment rather than only focusing on principal and interest. If taxes and insurance are not included in a mortgage calculator, it’s easy to overestimate your home buying budget.

### How PITI affects your mortgage qualification

When lenders assess whether or not you can afford a mortgage loan, they’ll compare your estimated PITI with your gross monthly income (income before taxes and deductions).

Your PITI, combined with any existing monthly debts, should not exceed 43% of your monthly gross income — this is called your debt-to-income ratio (DTI).

Your DTI is a primary factor in whether or not you’ll qualify for a mortgage.

## Do I qualify for a mortgage?

A mortgage calculator can be helpful when estimating your home buying budget. But remember — even if you can afford the monthly payments, you still need to qualify for a home loan.

To see if you qualify for a mortgage, a lender will check your:

• Credit score: Borrowers with higher credit scores tend to have more loan options. But mortgages are secured loans, which means you don’t always need stellar credit to qualify. Some lenders can approve FHA loans for borrowers with FICO scores as low as 580
• Loan-to-value ratio (LTV): LTV measures your loan amount against your new home’s value. For example, borrowing \$200,000 to buy a \$200,000 home equals 100% LTV. Lenders can offer VA or USDA loans at 100% LTV, but not everyone is eligible for these programs. FHA loans can’t exceed 96.5% LTV, which leaves 3.5% as the minimum down payment. Conventional loans can reach 97% LTV, meaning they allow a 3% down payment
• Home appraisal: A home appraisal identifies the home’s value. Lenders won’t approve loan amounts that exceed the home’s value, regardless of the home’s listing price or agreed-upon purchase price
• Personal finances: Lenders must verify your income to make sure you can afford the loan payments. They’ll check W-2s, bank statements, and employment records. If you’re self-employed, a lender will likely ask to see tax records

You can ask for a mortgage pre-approval or a prequalification to see your loan options and “real” budget based on your personal finances.

You can also track your credit score using free apps, but remember that the scores in free apps tend to be estimates. They often come in higher than your actual FICO score. Only a lender can tell you for sure whether you’re mortgage eligible.

## Mortgage calculator definitions

Buying a home involves more than just a down payment. Your total mortgage costs include repaying the home loan with principal and interest, plus paying for monthly fees like property taxes and home insurance.

As you experiment with the mortgage calculator, be sure you understand each term so you can enter accurate data and get precise answers.

### Home price

Home price is the dollar amount needed to buy the home. Your home price may turn out to be different from the listing price once you and the seller have finished negotiations and put the final price down in a purchase contract.

### Interest rate

Your interest rate determines how much money you will repay the bank for your mortgage. Though paid monthly, interest rates are expressed in annual terms.

• With a fixed-rate mortgage, your mortgage interest rate will remain unchanged for the life of the loan. This means your monthly payments will stay the same, too

When using this home mortgage calculator, you can use today’s average mortgage rate for “interest rate.” Lower interest rates mean you’re paying less each month and over the life of the loan.

### Length of the loan

Sometimes known as “loan term,” the length of the loan is the number of years until your home loan is paid in full. Most mortgages have a loan term of 30 years. Since 2010, 20-year and 15-year fixed-rate mortgages have grown more common.

The monthly cost of a mortgage is higher with a shorter-term loan, but less mortgage interest is paid over time. Homeowners with a 15-year mortgage will pay approximately 65% less mortgage interest as compared to a homeowner with a 30-year loan.

However, a shorter mortgage term requires higher monthly payments since the total amount repaid is spread across a shorter length of time.

### Down payment

A down payment is the amount of your own money you pay upfront to buy a new home. Your down payment, combined with the loan amount, will cover the entire purchase price.

A down payment can become immediate equity. For example, if you are buying a home for \$100,000 and you make a \$5,000 down payment, you will own \$5,000 equity (5%) in your new home even before making the first monthly payment.

Some mortgage programs, such as the conventional 97 and FHA loans, allow low down payments of 3-3.5%. Others, including the VA loan and USDA loan, require no down payment whatsoever.

Keep in mind, your down payment amount is not the only cash required at closing. You should be sure to budget for closing costs and other upfront items as well.

Most areas have down payment assistance programs to help borrowers come up with the cash to purchase their own homes. Conventional and FHA loans allow borrowers to use down payment money given by a close friend or relative.

### Homeowners insurance

Homeowners insurance protects your home against minor, major, and catastrophic loss. All homeowners are required to carry this protection, which is sometimes called “hazard insurance.”

Laws vary by state but, as a general rule, your homeowners insurance policy must be big enough to cover the cost of rebuilding your home as-is. Homeowners insurance costs vary by ZIP code and insurer.

Homeowners insurance should not be confused with private mortgage insurance, which is something else entirely.

Along with property taxes, homeowners insurance can be paid in equal installments along with your monthly mortgage payment. This arrangement is known as “escrowing” your taxes and insurance.

### Property taxes

Property taxes are taxes assessed on a home, and paid to your state, city, and/or local government(s). Property taxes can range in cost from 0.5% of your home’s value to 2% of its value or more on an annual basis.

Sometimes called “real estate taxes,” property taxes are typically billed twice annually. Along with homeowners insurance, property taxes can be paid in equal installments along with your monthly mortgage payment. This arrangement is known as “escrowing” your taxes and insurance.

### Escrow account

Escrow isn’t a term on the mortgage calculator, but it’ll appear in more than one phase of your home buying process.

Before you close, an escrow company will shuttle money between different parties.

For example, your earnest money — which tells the buyer you’re making a genuine offer — will likely go into escrow. It will be held there until closing, at which time it’s applied to your down payment.

After you close, your mortgage loan servicer will deposit part of your total monthly payment into another escrow account.

With each payment, this account’s balance will grow. When your property tax or home insurance bills come due, the lender will pay them out of escrow.

If you’d like to know how every dollar of your total monthly payment gets allocated, ask your loan officer for a payment breakdown.

### Homeowners Association (HOA) dues

Homeowners Association dues (also called HOA fees) are typically paid by condominium owners and homeowners in a planned urban development (PUD) or townhome.

HOA dues are paid monthly, semi-annually, or annually. They are paid separately to a management company or governing body for the association.

HOA fees cover common services for tenants and residents. These services may include landscaping, elevator maintenance, maintenance and upkeep of common areas such as pools and recreation areas, and legal costs.

Homeowners association dues vary by building and neighborhood.

### Mortgage insurance (PMI)

Mortgage insurance is a monthly fee paid by the homeowner for the benefit of the lender.

Mortgage insurance “pays out” when a loan goes into default, and it’s designed to protect mortgage lenders from taking losses on defaulted loans.

Mortgage insurance is required for conventional loans via Fannie Mae and Freddie Mac when the down payment is less than 20%. This type of mortgage insurance is known as private mortgage insurance (PMI).

Other loan types require mortgage insurance, too, including USDA loans and FHA loans. With FHA loans, mortgage insurance is called mortgage insurance premium (MIP).

Conventional PMI will be canceled once the homeowner has at least 20% equity. FHA mortgage insurance typically lasts the life of the loan, unless the buyer makes a down payment of 10% or more.

### Annual income

Annual income is the amount of documented income you earn each year. Income can be earned in many forms including W-2 income, 1099 income, K-1 distributions, Social Security income, pension income, and child support and alimony.

Non-reported income cannot be used for qualifying purposes on a mortgage. When using the home loan calculator, enter your pre-tax income. If you are self-employed, your actual income figures may differ from those you see on your tax return.

### Monthly debts

Monthly debts are your recurring payments, due monthly. Monthly debts may include auto leases, auto loans, student loans, child support and alimony payments, installment loans, and credit card payments.

Note, though, that your monthly obligation on a credit card is its minimum payment due and not your total balance owed. For credit cards with no minimum payment due, use 5% of your balance owed as your minimum payment due.

### Debt-to-income ratio

Debt-to-income ratio (DTI) is a lender term used to determine home affordability. The ratio is determined by dividing the sum of your monthly debts by your verifiable monthly income.

In general, mortgage approvals require a debt-to-income of 45% or less, although lenders will sometimes allow for an exception.

Note that carrying a DTI of 45% may not be advisable. A high DTI commits much of your household income to housing payments.

### Monthly payment

Your total monthly payment is your monthly obligation on your home. This includes your mortgage payment, property taxes, and home insurance — plus homeowners association dues (HOA) — where applicable.

Your monthly payment will change over time as its components change. Your real estate tax bill will change annually, as will the premium on your homeowners insurance policy, for example.

Homeowners with an adjustable-rate mortgage can expect their mortgage payment to change, too, after the loan’s initial fixed period ends.

### Amortization

Amortization is the schedule by which a mortgage loan is repaid to a bank. Amortization schedules vary by loan term. A 30-year mortgage will repay at a different pace than a 15-year or 20-year mortgage.

Early in the repayment period, your monthly loan payments will include more interest. As time passes, each month’s payment will include a little more principal and a little less interest.

By the end of the repayment period, you’re paying mostly loan principal and very little interest.

### Principal

Your loan principal is the amount borrowed from the bank. A portion of the principal is repaid to the bank each month as part of the overall mortgage payment.

The percentage of principal in each payment increases monthly until the loan is paid in full, which may be in 15 years, 20 years, or 30 years.

Paying principal each month increases your home equity, assuming your home’s value is unchanged. If your home’s value drops, your equity percentage will decrease in spite of reducing your loan’s balance.

Similarly, if your home’s value rises, your equity percentage will increase by an amount greater than what you’ve paid in principal.

### Interest

Interest is the money you pay the bank for the privilege of using the lender’s money to buy your home. Interest is paid monthly until the loan is paid off in full.

The portion of interest paid to the bank each month decreases according to your loan’s amortization schedule. Your mortgage interest paid over the life of your loan is based on your loan term and your mortgage interest rate.

### Loan Estimate

Federal law requires mortgage lenders to show you a three-page Loan Estimate after you apply for a mortgage loan.

The Loan Estimate (LE) shows your total mortgage costs — including the down payment, closing costs, monthly payments, and interest paid over the life of the loan.

All LEs are in a standard format, making it easy for you to compare loan offers side by side and find the best deal.

The loan calculator above can also estimate your long-term interest costs. Click the “view full report” button to see the estimate.

## Mortgage payment formula

For those who like a hands-on approach to determining their monthly mortgage payment, use this equation:

M = P[r(1+r)^n/((1+r)^n)-1)]

• M: Total monthly mortgage payment
• P: Principal loan amount
• i: Monthly interest rate. Lenders provide an annual, total interest rate, so divide that figure by 12 to determine your monthly interest rate. For example, if your best mortgage rate is 5%, then your monthly rate is 0.004167% (0.05/12 = 0.004167)
• n: Number of payments over the life of the loan. Multiple your loan term by 12 to determine the total number of payments. For example, a 30-year fixed-rate loan will have 360 monthly mortgage payments (30x12=360)

This formula will come in handy when determining how much home you can afford.

Also, since the equation does not account for down payments, it can be used when you’re refinancing your home.

Alternatively, a refinance calculator can help you decide whether or not refinancing your current mortgage loan will result in a lower monthly payment.