Consider Our Fast Forward Mortgage Program Before You Use Our Mortgage Calculator
What A Mortgage Calculator Doesn’t Say Can Hurt You
You might be approached by mortgage lenders and companies with a sales pitch and they will tell you based on some basic information you enter into a mortgage calculator or basic pre-qualification form YOU CAN GET X TYPE OF LOAN and pay X AMOUNT. Don’t base any plans on that information until you speak to a licensed loan advisor.
The Reason You need to speak to one of our qualified mortgage advisors is You Are Being Sold something that Isn’t Real yet. Kind of like when a car company tells you the monthly payment on a New $80,000 Mercedes is $300. No It Isn’t!!! … There might be one person in 1 million who would get that rate.
So what are the parts of a REAL mortgage payment and what you need to know while you are dreaming about where you are going to buy? After Calculating these things out Call (404) 238-7888 for detailed information about these considerations so you can Accurately determine what kind of payments you will make and not take a gizmo or sales person’s word for it.
How to Really Figure Out How Much You Can Afford – Calculate Your Income and Debt
Find out “how much house can I afford” by downloading and completing the Housing Cash Flow Sheet found in our “Simple Steps to Buying Your First Home”
PITI, PMI or MI: Principal, Interest, Taxes and Insurance
PRINCIPAL and INTEREST are the only price components anyone can quote you!
Remember that someone can only quote you a loan type based on principal and interest. That is based on the four major credit score factors you’re telling them are accurate. They don’t really matter until they have been verified by a qualified loan advisor, but they are:
- Your Debt to Income Ratio
- Your Credit Score
- Your Down Payment Size
- Your Work History
Principal: This is the base amount of your loan. A part of your principal is usually paid off with each mortgage payment which reduces the principal balance owed and increases your equity (the part of your home you own). Your principal payment is normally small in the first few months, but increases over the course of your mortgage as the overall balance drops. Interest-only mortgages and other types of loans, do not include principal repayment in the monthly calculation.
Interest: Your interest is the amount a lender charges you for borrowing money to buy your home. It includes a percentage of the outstanding principal. In the beginning, most of your mortgage payment is applied towards paying off the interest. As you begin to pay off your mortgage, more of your monthly payment is applied towards paying off the principal and less goes towards the interest. If you have an adjustable-rate mortgage, your mortgage rate can change during the loan. Your rate can change as well if you refinance your mortgage or make a large principal payment to lower your balance.
Taxes: Real Estate Taxes can be part of your mortgage payment. Your lender will pay these to your local city or county which helps pay for schools, roads, police and other local services. Taxes will vary completely and can be a significant part of your total, and your tax rates will vary significantly based on where you buy. Consider this as a hidden cost that calculators and pre-qualification systems cannot foresee.
Insurance: The fourth part of your PITI payment is Homeowner’s Insurance, which is often collected by your lender and paid to your insurance company. Homeowner’s insurance usually protects your home and property against fire or other damage. You may need additional coverage for other risks, depending on where you live. If your home is in an area with a high risk of flooding, for example, you will need flood coverage added.
PMI or MI: The last consideration is if you put less than a 20 percent down payment on your home purchase, you may also be required to have Private Mortgage Insurance (PMI) or Mortgage Insurance (MI) to protect the lender from default.
Loan Type Payments and Insurance Needs:
- Conventional = less than 20% down = PITI +PMI (or lender paid PMI = higher loan rate)
- FHA = PITI + MI regardless of down payment (MI is less with higher down payment)
- VA = PITI (no MI required)
- USDA = PITI + MI (MI is cheaper than FHA and Conventional)
(Conventional Loans – PMI varies based on credit and down payment)
(Government Loans “FHA, VA, USDA” – MI varies based on loan amount = flat calculation)
How To Calculate Mortgage Payments (PITI + PMI/MI):
- Enter the total amount of your mortgage loan and the term or amortization period of your mortgage into the mortgage calculator above. (example, 30 – for years)
- Enter the down payment amount you plan on paying. (FHA loans and Conventional programs require 3.5% and 3% Minimum, so multiply the loan amount by .035 or .03 in a calculator)
- Enter in an interest rate percent which you think you would reasonably qualify for (example, 5.0)
- Enter in how often you plan on making loan payments (monthly, weekly, bi-weekly), The more often you make payments the less you will pay for your home overall.
- Press calculate – The resulting amount is your Principle and Interest part of your payment
- To calculate your property taxes, divide the assessed value of a home by 100 and multiply by the tax rate. For example, for a $200,000 home in an area with a tax rate of 2.20, you would divide $200,000 by 100 (= $2,000) and multiply by 2.20. Your annual taxes would be $4,400. Dividing by 12 gives you the monthly installment: $367. (Your local tax structure should be checked with your local tax office or let one of our qualified mortgage advisors check it for you.)
- To calculate your monthly insurance payments, divide your total yearly premiums by 12. of course you cannot do this until you select a house and meet with a qualified mortgage advisor.
Combine all of these above and it will equal your total (Mortgage Payment) PITI + PMI/MI:
- Principle + Interest
- +Property Taxes
- +PMI or MI
- = Your Total Monthly Mortgage Payment
Mortgage Payment Calculator – Amortization Schedule & Compound Interest
A Mortgage Calculator will not always show you how much Compound interest plays a huge role in creating payment schedules that control how much borrowers have to pay each month, but it will keep you on track to understanding how you can control your own financing. A mortgage has an interest rate which decides how much interest you must pay in addition to your principal balance. It also determines how much profit your lender will earn.
You MUST also think about how often your rate gets applied to the mortgage principal. You can often lower your interest payments by controlling compounding periods.
What is an Amortization Calculator?
Don’t worry it’s actually very simple; banks sometimes just use jargon which seems complicated. To “Amortize” just means to break something down into payments. Amortization refers to the process of paying off a debt (usually a loan or mortgage) over time.
A portion of each payment pays on interest while the remaining amount gets applied towards the principal balance. A percentage of interest and principal for each payment can be determined with an amortization schedule. A mortgage calculator simply helps you to see these payments broken down into their respective sections.
Compound interest is interest that gets applied to your total amount of debt due on a mortgage, which includes principal and interest on your account. The way this works is when the rate is applied your interest is added back in and the next time the rate is applied, it is multiplied by a combination of your principal and any of your interest that has not yet been paid. You might think of it as a penalty, and try to avoid paying on interest payments. After all this is how banks make money right? By charging you interest and compounding interest. Compound interest is very common when dealing with mortgages: Not many mortgages use simple interest, which is applied only to the principal, the above mortgage calculator uses compounding interest.
Mortgage Compounding Periods
Pay close attention to your compounding periods, or how often your rate is multiplied to add in more interest, this is critical and determines how much you will pay over the life of your mortgage. Mortgage compounding periods are very different. Some can be compounded once every day or every week. Others may be compounded once a year or twice a year, but with most US mortgages, your compounding period is one month. Some loan compounding periods are biannual or annual, and your rate is often divided into monthly sections to make it easier to schedule.
Mortgage payment breakdown
Compound interest does not usually cause your mortgage payments to vary hugely, otherwise high rates would make your debt very difficult to pay as interest would be too large. In order to avoid this, lenders schedule each monthly payment with payments on the principal and payments on the interest.
In the beginning of the loan you will pay a large amount of interest and a small amount of principal each month to reduce the effects caused by compounding interest. This is why you are paying your interest down in the beginning. So you don’t get completely enslaved to compounding interest such as that used in the above mortgage calculator.
Compounding Period Changes
If you have a monthly payment schedule you might think about switching to a weekly or bimonthly payment schedule, which will increase your total amount of payments made on the mortgage within the year. The more frequently you make payments, the less frequently interest rate will be applied and you will pay off your loan faster and save on interest. But make sure that your lender keeps your compounding period the same throughout your contract amortization or “payment lifetime” in order to save the most money.
Disclosure: Even though a lower interest rate can have a profound effect on monthly payments and potentially save you thousands of dollars per year, the results of such refinancing may result in higher total finance charges over the life of the loan.