Figuring out how much of a mortgage loan you can afford can be challenging. That’s where a simple mortgage calculator can be a big help.
Mortgage calculators help first-time borrowers and veteran homebuyers calculate their estimated monthly housing payment based on several factors, including:
- the home’s purchase price
- the amount of money you have saved for a down payment
- the mortgage interest rate you hope to get
- your household income
- your monthly expenses
Check your credit history and credit score
Your credit history and credit score play a significant role in the mortgage and interest rate you may qualify for.
The better your credit score, the better your chances of getting a lower interest rate. Each of the three major credit bureaus allows one free credit report per year.
Gather the necessary financial information
Before using a mortgage calculator or talking to a mortgage lender, you’ll need to gather some financial information and documents—in addition to your credit score. These include
- Your annual income from all sources
- The amount of debt you have, including credit card payments, car loans, lines of credit, student loans, etc.
- The amount of savings you have
Use a mortgage calculator to estimate your mortgage
Now that you have the basic information, you can plug those numbers into a mortgage calculator and find out what you would pay each month.
Enter the price of the home, how much you’ll have for the down payment, and the other financial information you gathered above.
Try different down payment amounts and see how a larger or smaller amount could impact your monthly mortgage payments.
What does my monthly mortgage payment include?
Your monthly house payment covers more than just the amount of the mortgage home loan.
While each mortgage payment will reflect each borrower’s situation, mortgage loan payments generally include the following:
The principal amount is how much you borrowed from your mortgage lender. Each month a part of your payment goes to repaying that original amount.
The interest rate is what you pay to borrow money. It’s the “fee” or “cost” of borrowing the amount of your mortgage. Interest rates can be fixed (often called a fixed-rate mortgage), meaning they remain the same, or variable (sometimes called an adjustable-rate mortgage), meaning they can shift based on market activity. Interest is expressed as a percentage.
Private mortgage insurance (PMI)
PMI is a type of insurance that protects the lender in case you cannot continue making payments on your home loan.
Private mortgage insurance premiums typically range between 0.5 – 1% of the amount of your mortgage. Most mortgages require borrowers to pay PMI if their down payment is less than 20% of the home price.
The municipality where your home is located will charge property taxes. The funds raised from property taxes are used to pay for public services like water, sewage, garbage collection, snow removal, police, fire, and emergency response services. Property tax rates vary depending on location.
Mortgage lenders typically require homeowner’s insurance before a home loan is approved. Homeowner’s insurance protects you and your lender’s investment against certain damages.
Homeowner Association Fees (HOA)
HOA fees are sometimes included in monthly mortgage payments. This is common if your new home is in a shared community like a townhome, condominium, or other defined community. Because HOAs are private organizations—not associated with your lender—their rates can vary widely.
How principal and interest work
In the beginning, the principal you’ll pay will be relatively small, and the amount of interest will be larger.
But, over time, that reverses so that toward the end of your mortgage term, most of your monthly mortgage payment will be principal, and a small amount will go toward paying off interest.
Get pre-approved for a mortgage
While a mortgage calculator can estimate what you might pay each month, the most accurate way to know how much your home loan and payments will be is to get pre-approved for a mortgage.
Mortgage pre-approval also has the added benefit of telling sellers you’re a serious buyer who can financially afford to complete the purchase.
With mortgage pre-approval, the lender verifies your financial information and gives you a conditional home loan offer, provided you meet eligibility requirements.
To do this, lenders typically require several financial documents in addition to your credit score. These can include:
- Two year’s worth of W-2s
- Pay stubs, investment, and bank statements for the last four to six months
- If you receive child support or alimony, you will need to provide a copy of your divorce documents
- If someone in your family gives you money to purchase your home, you’ll need a letter confirming that it is a gift, not a loan (i.e., they do not require you to repay the money)
If you google “mortgage calculator,” you’ll find a lot of results.
That’s because a mortgage calculator can be a great tool in the early stages of the home buying process. But it’s important to know what a mortgage calculator can and can’t do.
A mortgage calculator can help you understand
- How much you could afford to spend on a home—based on your gross monthly income and total monthly debt information,
- Estimated homeowner’s insurance, property taxes, mortgage insurance, and other related fees.
But it’s important to remember that a mortgage calculator won’t be able to tell you everything.
Mortgage calculators provide general information; they don’t use the same mortgage formula your lender will use to evaluate your eligibility. For example, a mortgage calculator won’t let you know:
- Whether you’ll meet a lender’s eligibility requirements for a specific mortgage loan amount,
- What interest rate you’ll be eligible to receive, or
- How much you might spend on closing costs.
Apply with AAA Banking today
Start your mortgage process with AAA Banking.
We’re here to provide the guidance and information you need to help you get the best mortgage for your dream home.
At AAA we’re not just mortgage experts. We’re your ally in making home financing affordable, convenient, and personal.
Count on us when you’re ready to purchase a home or refinance an existing loan.
Photo by RODNAE Productions