Mortgage Calculator

How to Calculate a Mortgage

A mortgage is a loan that helps to finance the purchase of a home. When you take out a mortgage, you agree to pay back the loan principal, plus interest, over a set period of time. Your monthly mortgage payment is determined by the size of your loan, your interest rate, and the term of your mortgage. The term is the length of time you have to repay your mortgage, and it can range from 5 to 30 years. The type of mortgage you choose will also affect your monthly payment.

Types of Mortgages

There are two common types of types of mortgages available to home buyers - fixed, and adjustable-rate mortgages.

Fixed

A fixed rate mortgage is a type of home loan in which the interest rate remains fixed for the life of the loan. This type of mortgage amortizes over time, gradually reducing the principal balance as you pay back the loan. There are different fixed rate mortgage terms available, with the most common being a 15 year or 30 year fixed rate mortgage. Fixed rate mortgages tend to be attractive for borrowers who are looking for certainty in their monthly mortgage payment, as well as for borrowers who plan to live in the home for many years.

Adjustable-Rate Mortgages

An adjustable rate mortgage, commonly referred to as an ARM, is a type of mortgage where the interest rate is fixed for a period of time, typically 5 to 7 years, and then floats thereafter. The benefit of an ARM is that it usually has a lower interest rate than a fixed-rate mortgage for the fixed period. After the fixed period ends, the interest rate will adjust periodically, typically once a year, based on changes in a financial index. The payments during the fixed period may be interest only, which means that you are not paying down any principal. At the end of the fixed period, you may have the option to amortize the loan over a number of years or make interest-only payments. There is also typically a limit, or cap, on how much the interest rate can increase during each adjustment period as well as over the life of the loan. ARMs can be attractive for borrowers who expect their incomes to rise over time or who plan on selling their home before the interest rate resets after the fixed period.

Mortgage Terms to Know

The mortgage terms a home buyer may need to know are outlined below.

Purchase Price

The purchase price of a home is the amount of money that is conveyed for the transfer of ownership. Whether you are buying your first home or exploring other investment options, it is always important to understand exactly what you are paying for when you purchase a home.

Down Payment

A down payment is an initial equity contribution that is required when purchasing a home or other large asset. Traditionally, a down payment represents a percentage of the total purchase price of the asset and is paid by the buyer at the time of purchase. Depending on the type of asset being purchased and the mortgage or loan agreement, there may be restrictions on how much of a down payment can be required.

Loan Amount

The loan amount is the purchase price of the home minus the down payment. This is the amount of money a homebuyer is borrowing from the lender, and is one of the key components used in calculating the monthly payment.

Loan Type

There are various types of mortgages available, but the most common are fixed-rate and adjustable-rate. Mortgages can be obtained from banks, credit unions, and mortgage lenders. Each lender will have different terms and conditions for their loans, so it is important to shop around and compare before choosing a mortgage.

Interest Rate

A mortgage interest rate is the amount a bank charges you to borrow money to buy a home. The interest rate is expressed as a percentage of the loan amount and may be fixed or variable. The interest rate is important because it determines how much your monthly mortgage payment will be. A higher interest rate will result in a higher monthly payment, while a lower interest rate will result in a lower monthly payment.

Loan Term

The loan term is the amount of time you have to repay your loan. A typical mortgage has a 15 or 30 year loan term, meaning you'll make monthly payments for 15 or 30 years, respectively. Other loans may have shorter or longer terms, depending on the amount of money borrowed and the lender's requirements. In general, the longer the loan term, the lower your monthly payments will be, but you'll end up paying more in interest over the life of the loan. Conversely, a shorter loan term will result in higher monthly payments, but you'll save money on total interest in the long run.

Principal

The mortgage principal is the amount of money that is borrowed. At the beginning of the loan the principal balance is the loan amount, and over time the principal amount decreases by the amount of each monthly payment attributed to paying down principal.

Interest

A borrower pays the lender periodic interest payments over the life of the loan. The amount of interest charged depends on the remaining principal balance , the interest rate, and the length of the loan.

Monthly Payment

A monthly mortgage payment is a combination of principal and interest that is paid to the lender every month. Principal is the amount of the monthly payment reducing the amount borrowed, and interest is the fee charged for borrowing the money.

Escrow of Property Taxes and Insurance

The monthly mortgage payment also may include taxes and insurance, which are typically escrowed by the lender and paid to the appropriate authorities on behalf of the borrower. By withholding these costs each month, it ensures that they are paid punctually, even if you as the homeowner fail to do so yourself. In addition, having a portion of your monthly payment designed specifically to cover these expenses also helps provide stability and predictability for both parties involved.