Important Terms Explained
What is a mortgage?
A mortgage is a type of loan that helps people buy homes. When you take out a mortgage, you get money from a lender to help pay for the home.
The lender will hold your house as a guarantee until you finish paying off the loan. If you fail to make payments, the lender has the right to take control of your home. This process is called foreclosure.
It usually comes with terms and conditions that specify how much you can borrow, the interest rate, and when the payments are due each month. The lender will also need some form of collateral to guarantee the loan, which might be money or property.
It is essential to read the terms of your loan before you sign anything. It is a long-term commitment. Thus, it is vital that you feel confident and comfortable with the deal.
What is the Interest rate?
A mortgage is a loan that you get to help pay for a house. You have to pay the money back over time with extra money, called interest. You will end up paying more than you took at first.
The interest rate is the percentage of your loan you pay on top of the original amount. It will affect how much you have to pay back every month. Thus, understand all the facts before deciding on a specific loan.
How much you pay for your monthly mortgage can differ based on many things. The amount of money you get, the type of mortgage you choose, and the market.
When comparing different mortgages, check out both fixed-rate and adjustable-rate loans.
A fixed-rate mortgage has the same interest rate for the entire time of the loan. So your payments will stay the same every month. The interest rate on an adjustable-rate mortgage (ARM) is lower at first, but it can change based on the market.
Loan start date
When you sign up for a mortgage, the loan start date is the official day your loan begins. Your loan start date is usually set when you sign your mortgage agreement or close on your home purchase.
Lenders often put the date in fine print on your contract. Thus, read all paperwork carefully and ask your lender any queries you may have before you sign.
Your mortgage payments will usually begin 30 days after this date, so be sure to budget ahead of time for these expenses.
Loan Amount
The loan amount depends on the property’s value and can range from hundreds of thousands to millions of dollars.
For example, if you want to buy a house for $500,000, you must borrow around $400,000. This is called the loan amount. Most mortgage lenders only allow you to borrow up to 80% of the property’s value.
The loan amount is usually two parts – the principal and interest. The principal is the money that you borrow. The interest is extra money that you have to pay when you borrow money.
Your loan amount may also be affected by taxes, insurance premiums, and other closing costs related to a mortgage.
Down Payment
A down payment is money you pay upfront to buy a home. It’s part of your total mortgage amount and helps lower the cost of borrowing a house.
The more money you put down, the less you have to borrow from a lender, which can help reduce the interest cost over time.
When it comes to making a down payment, there is no set amount. It all depends on your budget and the type of loan you’re looking for. Generally, lenders require a minimum of 3% – 6% of the total purchase price as a down payment.
Home price
Home price is the amount of money you want to pay. It is based on the cost of the home plus any applicable taxes and fees. This amount is often determined by the size of your down payment, credit score, and other factors.
Loan Term (years)
The loan term is the time you have to pay back your mortgage. It is usually 5 to 30 years, but some mortgages can be up to 40 years long. The longer the loan term, the lower your monthly payments will be.
When deciding how long your loan term will be, it’s important to consider what will work best financially.
If you have a regular income, you should take out a mortgage with shorter loan terms and higher monthly payments.
If you do not have a lot of money coming in every month, choose a longer loan. That way, your monthly payments will be easier to afford.
No matter which loan term you choose, make sure you can pay all of your bills and other expenses every month.
How to calculate your mortgage payments
The math behind mortgage payments is complicated. However, our mortgage calculator fixes this problem for you.
Enter the price you are buying the home for or the current value of your home if you are refinancing in the space labeled “Purchase price.”
In the “Down payment” section, type in how much money you put down for the home. If you already have a home, you can put in how much equity you have. Equity is when the value of your home minus what you owe on it. You can write out a dollar amount in the calculator.
The next thing you will see is “Length of loan.” It is how long you have to pay back the money you borrow. The most common choice is 30 years, but you can also choose 20, 15, or 10 years.
In the “Interest rate” box, enter the percentage of interest you expect to pay. The calculator has the average rate set, but you can change it. Your interest rate will be different if you are buying or refinancing.
As you enter these numbers, a new amount for the principal and interest will appear on the right. Incompreneur’s calculator also estimates property taxes, homeowners insurance, and homeowners association fees.
The company may tell you how much it will cost to pay for the taxes and insurance. You can choose to pay these separately or together with your loan payments. These costs do not affect how much your loan will be.
costs included in a mortgage payment
Principal Amount:
The principal amount of the mortgage loan is the main part, without any extra interest or fees. It is usually defined by how much money you have saved for a down payment, your credit score, and how much house you can afford.
The higher your credit score and down payment, the more money you can borrow as your mortgage loan amount.
Interest Amount:
When you get a mortgage, the lender will charge you interest. It is extra money that you have to pay back. They calculate the interest rate as a percentage of the total loan. The longer it takes you to pay back the loan, the more interest you will have to pay.
Property taxes
Property taxes are a type of tax that owners need to pay on their property. They are usually a percentage of the value of your property. The money goes towards things like schools, roads, and parks.
Property taxes can be different in different states. To find out how much you will need to pay, look up your local laws and regulations. The tax you will need to pay will depend on the city or county where your property is located.
Mortgage insurance:
Mortgage insurance protects lenders if you can’t pay back your mortgage. If you’re approved for a loan but don’t have the money to make a down payment of 20% or more, you may need to get mortgage insurance.
This can happen if you’re buying a house or refinancing an existing mortgage. It helps to protect the lender in case you default on your loan.
Homeowners insurance:
Homeowners insurance protects your home from fires, winds, and theft. It also covers you if someone gets hurt on your property or if you damage someone else’s property.
It also covers certain possessions that you keep in your house, such as furniture, electronics, and clothing.
If you have a mortgage, your lender usually requires to buy insurance. The lender wants to ensure that their investment, your home, is protected in case of disaster.
Mortgage payment formula
Mortgage payment calculation is pretty simple when you understand the formula. The basic formula for calculating your monthly mortgage payments is as follows:
- M is the monthly payment
- P is the principal loan amount (the initial amount you borrow)
- r is the monthly interest rate (divide your annual interest rate by 12 to get this figure)
- n is the number of payments over the life of the loan
Note: To find out how many payments you will make for your loan, multiply the years in your loan term by 12. For example, if you have a 30-year fixed mortgage, you will have 360 payments (30×12=360).
The first part of the equation, P x r, is how much interest you’ll pay each month. The other part, (1+r)^n / [(1 + r)^n – 1], is more complicated. It’s how you figure out the principal amount you’ll pay each month and interest.
Here is an example. You borrow $500,000, and the interest rate is 5%. You will have to pay back the money in 30 years. To calculate your monthly mortgage payments, use this formula:
M = 500,000 * (0.05 / 12) x [(1 + 0.05/12)^360] / [(1 + 0.05/12)^360 – 1]
M = $2,541.46
So, your monthly mortgage payments for this loan would be about $2,541.46. Easy, right?
How a Mortgage Payment Rate Calculator can help
When budgeting for a house, it is vital to know how much your mortgage payment will be. It is usually the biggest expense you will have every month.
Our calculator can help you figure out what your mortgage payment will be. Enter details into the calculator to see payment. The calculator can help you make decisions about things like:
Right Length of Loan:
A 30-year fixed-rate mortgage is a right choice if you have a set budget. It comes with lower monthly payments, although you will end up paying more interest over the life of the loan.
If you have some wiggle room in your budget, a 15-year fixed-rate mortgage will reduce the total amount of interest you pay, but your monthly payment will be higher.
Is an ARM a Good Option?
Some people might want to choose an adjustable-rate mortgage (ARM) when rates go up. The first rate for ARMs is usually lower than the fixed mortgage.
It has a five-year fixed rate, then adjusts every six months. This might be the right choice if you only plan to stay in your home for just a few years. But make sure you know how much your monthly mortgage payment could go up when the introductory rate expires.
How Much to Put Down:
The standard down payment is 20 percent, but you don’t have to pay that much. Some people only pay 3 percent.
Manage Your Budget:
It will give an estimate of the amount for every month. Thus, you can easily adjust your budget.
How to lower your monthly mortgage payment
If the monthly payment in our calculator is too high, try changing some things to lower it. You can try playing with a few variables:
- Long-Term Loan: With a longer term for your loan, your monthly payments will be lower. However, you will end up paying more interest over the life of the loan.
- Bigger down payment: This will help you get a smaller loan.
- Avoid PMI: If you have a down payment of 20% or more, you do not have to pay for private mortgage insurance (PMI).
- Spend less on the home: If you borrow less money, your monthly payments will be smaller.
- Get low-interest rate: Be aware that some low rates require paying points, an upfront cost.
How to Decide Your Budget
If you’re not sure how much money you should spend on housing, follow the 28/36 percent rule. It is tried and true, which means many people have used it, and it usually works.
Generally, financial advisors advise against spending more than 28 percent of your gross income on housing costs. Also, up to 36 percent of total debt, including mortgages, credit cards, student loans, and medical bills.
Here’s an example of what this looks like:
Bryan’s yearly salary is $54,000. That means he makes $4,500 every month. If he wants a house, his monthly mortgage payment (PITI) would be $1,260.
While you can spend up to 50% of your income on a mortgage, this is not a good idea. You might not have enough money for other things like food, retirement, and fun activities.
Lenders do not think about these things when they say how much money you can borrow. Remember to include these extra expenses before getting a mortgage loan.
After you figure out how much money you can spend, you can do the next step. Do not get a 30-year home loan that is too expensive, even if the bank will give you the money.