How Does a Mortgage Payment Calculator Work?
If you are planning to buy a home, you will need to take out a mortgage. You will be very excited about submitting your application to the lender and getting it approved. However, before you do this, have you taken a few minutes to calculate whether you can afford a mortgage? Well, if you haven’t, it is time to put on your thinking cap and start using a mortgage payment calculator.
Why are Mortgage Payment Calculators a Necessity?
Most people end up taking a mortgage without realizing the long-term implications of this debt. A health emergency or job loss can prove to be a disaster for you and your newly acquired home. A mortgage payment calculator lets you check out a range of scenarios, though the most common use of the calculator is determining monthly payments. Nonetheless, with an online payment calculator designed for mortgages, you can even find out the details of an unknown variable of your long-term loan, that is if you know the other three variables.
Of course, it is important to understand a mortgage payment calculator just gives you an approximate amount, but it definitely puts things in a clearer perspective and allows you to weigh the impact of the mortgage. This also is the tool to use if you intend to refinance your mortgage for a lower interest rate or shorter duration.
Tips to Use a Mortgage Calculator
To realize such a mortgage payment calculator’s true potential, you should know how to use it effectively.
Each calculator uses a fixed algorithm to calculate the result based on the inputs you provide. Typically, a mortgage payment calculator will ask you to enter the following in the space provided:
- Price of the home
- Loan amount you have qualified for
- Interest rate
- Term of the loan amount
- Start date of the loan
- Property tax
- PMI (private mortgage insurance)
Once you fill in the details and click “Enter” or “Calculate”, the calculator will run the algorithm in the background and within few seconds gives you a detailed report of your liabilities. Each calculator is different and programmed to offer you different results. Typically, you will get the following information:
- Monthly payment
- Total payments for 360 months (30 years)
- Total interest
- Total tax
- Total PMI
- Monthly PMI
- Date when you pay off the PMI
Some mortgage payment calculators may also show you a comparison between bimonthly and monthly payments to show your liabilities and the mortgage pay off date along with the interest payment. This allows you to see the amount you can afford and save, depending on which repayment option you choose.
The Bottom Line
A mortgage payment calculator lets you figure out whether you can afford the monthly payments. Remember, even if you think you can handle a large mortgage, never let your total debt exceed 50 percent of your income. Your home should improve your quality of life and not turn into an unbearable burden. So, use the calculator and turn into a prudent borrower and homeowner.