🏠 Mortgage Calculator

Mortgage Guide

The Mortgage Calculator helps estimate the monthly payment due along with other financial costs associated with mortgages. There are options to include extra payments or annual percentage increases of common mortgage-related expenses. The calculator is mainly intended for use by U.S. residents.

Mortgages

A mortgage is a loan secured by property, usually real estate property. Lenders define it as the money borrowed to pay for real estate. In essence, the lender helps the buyer pay the seller of a house, and the buyer agrees to repay the money borrowed over a period of time, usually 15 or 30 years in the U.S. Each month, a payment is made from buyer to lender. A portion of the monthly payment is called the principal, which is the original amount borrowed. The other portion is the interest, which is the cost paid to the lender for using the money.

There may be an escrow account involved to cover the cost of property taxes and insurance. The buyer cannot be considered the full owner of the mortgaged property until the last monthly payment is made. In the U.S., the most common mortgage loan is the conventional 30-year fixed-interest loan, which represents 70% to 90% of all mortgages. Mortgages are how most people are able to own homes in the U.S.

Mortgage Calculator Components

A mortgage usually includes the following key components. These are also the basic components of a mortgage calculator.

• Loan amount—the amount borrowed from a lender or bank. In a mortgage, this amounts to the purchase price minus any down payment. The maximum loan amount one can borrow normally correlates with household income or affordability.
• Down payment—the upfront payment of the purchase, usually a percentage of the total price. This is the portion of the purchase price covered by the borrower. Typically, mortgage lenders want the borrower to put 20% or more as a down payment. In some cases, borrowers may put down as low as 3%. If the borrowers make a down payment of less than 20%, they will be required to pay private mortgage insurance (PMI).
• Loan term—the amount of time over which the loan must be repaid in full. Most fixed-rate mortgages are for 15, 20, or 30-year terms. A shorter period, such as 15 or 20 years, typically includes a lower interest rate.
• Interest rate—the percentage of the loan charged as a cost of borrowing. Mortgages can charge either fixed-rate mortgages (FRM) or adjustable-rate mortgages (ARM). As the name implies, interest rates remain the same for the term of the FRM loan.

Costs Associated with Home Ownership and Mortgages

Monthly mortgage payments usually comprise the bulk of the financial costs associated with owning a house, but there are other substantial costs to keep in mind. These costs are separated into two categories, recurring and non-recurring.

Recurring Costs

Most recurring costs persist throughout and beyond the life of a mortgage. They are a significant financial factor. Property taxes, home insurance, HOA fees, and other costs increase with time as a byproduct of inflation.

• Property taxes—a tax that property owners pay to governing authorities. In the U.S., property tax is usually managed by municipal or county governments. All 50 states impose taxes on property at the local level. The annual real estate tax in the U.S. varies by location; on average, Americans pay about 1.1% of their property's value as property tax each year.
• Home insurance—an insurance policy that protects the owner from accidents that may happen to their real estate properties.
• Private mortgage insurance (PMI)—protects the mortgage lender if the borrower is unable to repay the loan. The annual cost typically ranges from 0.3% to 1.9% of the loan amount.
• HOA fee—a fee imposed on the property owner by a homeowner's association (HOA). Annual HOA fees usually amount to less than one percent of the property value.
• Other costs—includes utilities, home maintenance costs, and anything pertaining to the general upkeep of the property.

Non-Recurring Costs

These costs aren't addressed by the calculator, but they are still important to keep in mind.

• Closing costs—the fees paid at the closing of a real estate transaction. In the U.S., the closing cost on a mortgage can include an attorney fee, the title service cost, recording fee, survey fee, property transfer tax, brokerage commission, mortgage application fee, points, appraisal fee, inspection fee, and more.
• Initial renovations—some buyers choose to renovate before moving in.
• Miscellaneous—new furniture, new appliances, and moving costs are typical non-recurring costs of a home purchase.

Early Repayment and Extra Payments

In many situations, mortgage borrowers may want to pay off mortgages earlier rather than later, either in whole or in part, for reasons including but not limited to interest savings, wanting to sell their home, or refinancing. Our calculator can factor in monthly, annual, or one-time extra payments. However, borrowers need to understand the advantages and disadvantages of paying ahead on the mortgage.

Early Repayment Strategies

1. Make extra payments—This is simply an extra payment over and above the monthly payment. Any extra payments will decrease the loan balance, thereby decreasing interest and allowing the borrower to pay off the loan earlier in the long run.
2. Biweekly payments—The borrower pays half the monthly payment every two weeks. With 52 weeks in a year, this amounts to 26 payments or 13 months of mortgage repayments during the year.
3. Refinance to a loan with a shorter term—Refinancing involves taking out a new loan to pay off an old loan. In employing this strategy, borrowers can shorten the term, typically resulting in a lower interest rate.

Reasons for early repayment

• Lower interest costs—Borrowers can save money on interest, which often amounts to a significant expense.
• Shorter repayment period—A shortened repayment period means the payoff will come faster than the original term stated in the mortgage agreement.
• Personal satisfaction—The feeling of emotional well-being that can come with freedom from debt obligations.

Drawbacks of early repayment

• Possible prepayment penalties—A prepayment penalty is an agreement, most likely explained in a mortgage contract, between a borrower and a mortgage lender that regulates what the borrower is allowed to pay off and when.
• Opportunity costs—Paying off a mortgage early may not be ideal since mortgage rates are relatively low compared to other financial rates.
• Capital locked up in the house—Money put into the house is cash that the borrower cannot spend elsewhere.
• Loss of tax deduction—Borrowers in the U.S. can deduct mortgage interest costs from their taxes.

Brief History of Mortgages in the U.S.

In the early 20th century, buying a home involved saving up a large down payment. Borrowers would have to put 50% down, take out a three or five-year loan, then face a balloon payment at the end of the term.

Only four in ten Americans could afford a home under such conditions. During the Great Depression, one-fourth of homeowners lost their homes.

To remedy this situation, the government created the Federal Housing Administration (FHA) and Fannie Mae in the 1930s to bring liquidity, stability, and affordability to the mortgage market. Both entities helped to bring 30-year mortgages with more modest down payments and universal construction standards.

These programs also helped returning soldiers finance a home after the end of World War II and sparked a construction boom in the following decades. Also, the FHA helped borrowers during harder times, such as the inflation crisis of the 1970s and the drop in energy prices in the 1980s.

By 2001, the homeownership rate had reached a record level of 68.1%.

Government involvement also helped during the 2008 financial crisis. The crisis forced a federal takeover of Fannie Mae as it lost billions amid massive defaults, though it returned to profitability by 2012.

The FHA also offered further help amid the nationwide drop in real estate prices. It stepped in, claiming a higher percentage of mortgages amid backing by the Federal Reserve. This helped to stabilize the housing market by 2013. Today, both entities continue to actively insure millions of single-family homes and other residential properties.