Understanding your mortgage is essential when planning your finances for a new home. Our Mortgage Calculator simplifies this process by providing accurate estimates of your monthly payments, total interest, and overall loan costs.

A mortgage is like a loan that's tied to a piece of property, usually a house. It's what you borrow from a bank or lender to buy real estate. So, when you're ready to buy a home, the lender steps in to help pay the seller.

Then, you agree to pay back that money over time, usually spanning 15 or 30 years in the U.S. Each month, you make a payment to the lender, which covers part of what you borrowed (that's called the principal) along with any interest.

Essentially, it's like gradually buying your house while you live in it. Another part of your mortgage payment is the interest, which is what you pay the lender for letting you borrow their money. Sometimes, there's also an escrow account, which helps cover costs like property taxes and insurance.

It's important to know that you don't fully own the property until you've made the very last monthly payment. In the U.S., the most common type of mortgage is the 30-year fixed-interest loan, where the interest rate stays the same for the entire 30 years. This type of loan makes up the 70-90% of mortgages, making it easier for many people to buy homes.

Components of Mortgage Calculator

When you're talking about a mortgage, there are a few important things to keep in mind.

Loan Amount

First up is the loan amount, which is basically how much money you're borrowing from the bank or lender to buy your home. It's usually the purchase price of the house minus any down payment you make.

How much you can borrow typically depends on your household income and what you can afford. If you want to get an idea of how much you can comfortably afford, you can check out our House Affordability Calculator. It's a great tool to help you plan out your budget for buying a home.

Down Payment

When you're buying a home, the down payment is a big deal. It's the upfront payment you make, usually a percentage of the total price of the house. Think of it as your initial investment in the home.

Mortgage lenders usually like to see a down payment of around 20% or more, but sometimes you can get away with as little as 3%. If you put down less than 20%, though, you'll likely have to pay something called private mortgage insurance (PMI).

This insurance protects the lender in case you can't make your payments. You'll need to keep paying PMI until you've paid off enough of your loan that you owe less than 80% of the home's original purchase price.

Here's a little tip: the bigger your down payment, the better your chances of getting a lower interest rate and getting approved for your loan.

Loan Term

The loan term is basically how long you have to pay back the loan in full. For most fixed-rate mortgages, you'll see terms like 15, 20, or 30 years. If you go for a shorter term, like 15 or 20 years, you'll usually get a lower interest rate.

It's like deciding how quickly you want to pay off your loan. A shorter term means higher monthly payments, but you'll pay less in interest overall and own your home sooner.

It's all about finding the right balance between what you can afford each month and how quickly you want to be debt-free.

Interest Rate

The interest rate is basically the percentage of your loan that you pay as a fee for borrowing the money. When it comes to mortgages, you'll encounter two main types: fixed-rate mortgages (FRM) and adjustable-rate mortgages (ARM).

With a fixed-rate mortgage, your interest rate stays the same for the entire term of the loan. That means your monthly payments will stay consistent too, which can make budgeting easier.

Now, for adjustable-rate mortgages, or ARMs, the interest rates can change after a certain period of time.

They often start with lower initial rates compared to fixed-rate mortgages, which can be tempting. But keep in mind, those rates could go up later, depending on market conditions.

Mortgage interest rates are usually expressed as an Annual Percentage Rate, or APR. This includes both the interest rate and any additional fees, giving you a clearer picture of the total cost of borrowing. It's like knowing the full price tag upfront before you commit to anything.

Cost correlated with Mortgages and Home ownership

When you own a house, your monthly mortgage payments are the big chunk of your expenses. But there are other important costs to consider too, split into two categories recurring and non-recurring.

Recurring costs

Recurring costs are a big deal when you're a homeowner because they stick around even after you've paid off your mortgage.

Things like property taxes, home insurance, and HOA fees are part of this group, and they tend to go up over time due to inflation.

In the calculator, you'll find these recurring costs under the "Include Options Below" checkbox. Plus, there are optional fields for annual percentage increases under "More Options."

Using these features can give you a more accurate picture of what your future expenses might look like. It's all about making sure you're prepared for the long haul when it comes to owning a home.

Property Tax

Property taxes are basically the taxes you pay to the local government for owning property. In the U.S., municipal or county governments typically handle these taxes, and they're imposed in all 50 states at the local level.

The amount you pay in property tax each year can vary depending on where you live, but on average, it's about 1.1% of your property's value.

So, if your home is worth $200,000, you might expect to pay around $2,200 in property taxes annually. It's an important part of homeownership to budget for!

Home insurance

Home insurance is like a safety net for homeowners, shielding them from unexpected mishaps with their property.

It's not just about covering damage to your home itself; it can also include personal liability coverage, which comes in handy if someone gets hurt on your property and decides to sue you.

The cost of home insurance isn't one-size-fits-all. It depends on factors like where you live, the condition of your home, and how much coverage you need.

So, if you're in an area prone to natural disasters, or if you have a lot of valuable belongings to protect, you might pay more for insurance.

It's a smart move to shop around and find the right policy that fits your needs and budget. After all, having that protection in place can give you peace of mind as a homeowner.

Private mortgage insurance (PMI)

Private mortgage insurance (PMI) is like a safety net for lenders in case borrowers can't keep up with their mortgage payments.

In the U.S., if you put down less than 20% when buying a home, your lender will usually ask you to get PMI.

It's there to protect them until you've paid off enough of your loan that you own at least 20% of your home's value.

Now, the cost of PMI varies based on a few things, like how much you put down, the size of your loan, and your credit score. On average, it can range from around 0.3% to 1.9% of your loan amount each year.

So, if you borrow $200,000, you might pay anywhere from $600 to $3,800 a year for PMI. It's an extra expense to consider, but it can help you get into your dream home sooner, even if you don't have a huge down payment saved up.

HOA Fee

This fee is basically a charge you pay if you own a home in a neighborhood governed by a homeowner's association (HOA).

This group looks after the community and makes sure everything stays nice and tidy. If you live in a condo, townhome, or some single-family home communities, you'll likely have to pay these fees.

The money from HOA fees goes towards things like keeping shared spaces clean, maintaining amenities like pools or playgrounds, and sometimes even things like landscaping.

Non-Recurring Costs

Closing costs

They are the fees you pay when you finalize a real estate deal. They're a one-time expense, but they can add up pretty quickly.

In the U.S., closing costs for a mortgage can cover a bunch of different things, like attorney fees, title services, recording fees, and more.

Here's a quick rundown of some common closing costs: attorney fees, title service costs, recording fees, survey fees, property transfer taxes, brokerage commissions, mortgage application fees, points, appraisal fees, inspection fees, home warranties, prepaid home insurance, prorated property taxes, prorated homeowner association dues, prorated interest, and more. Whew, that's a lot!

Usually, the buyer is the one responsible for paying these costs, but you might be able to negotiate with the seller or lender to help cover some of them.

On average, buyers can expect to shell out around $10,000 in total closing costs for a $400,000 home. It's a hefty chunk of change, but it's all part of the process of sealing the deal on your new home.

Initial renovations

Before moving into the house, some folks opt for a bit of home improvement. They might swap out the flooring, give the walls a fresh coat of paint, or give the kitchen a modern facelift. Some even go all out and revamp the whole shebang, inside and out!

Now, these renovations can put a dent in your wallet, no doubt about it. But remember, they're completely optional. It's all about what suits your style and timeline for your new home!

Miscellaneous

New furniture, new appliances, and moving cost and repair are non-recurring cost newly acquired home.

Early Refund and Additional Payments

Sometimes, you want to get rid of their mortgage faster, whether it's to save on interest, prepare for selling their home, or considering refinancing. Our calculator can help you figure out how to make extra payments each month, year, or even as a one-time lump sum.

In addition, paying off your mortgage early comes with its pros and cons. It's important to weigh them carefully. While you can save money on interest in the long run, you might also miss out on other investment opportunities. It's all about finding the right balance for your financial goals.

Extra payment

In the beginning stages of a long-term mortgage, a big chunk of what you pay each month goes toward interest, rather than actually reducing the amount you owe (that's called the principal).

But when you make extra payments, you're chipping away at that loan balance faster. This means you'll pay less interest overall and could even pay off your mortgage sooner!

Some people make it a regular thing to pay extra every month, while others do it whenever they have some extra cash on hand.

Our Mortgage Calculator has options for including these extra payments, so you can see how they affect your loan. It's a great way to compare different scenarios and see what works best for you.

Biweekly payment

In this mode of payment instead of making one monthly, you pay half of your monthly amount every two weeks.

Since there are 52 weeks in a year, this adds up to 26 payments, which is the equivalent of making 13 months of mortgage payments in a year.

This method is great for folks who get paid every two weeks because it lines up with their paycheck schedule. It's easier for them to set aside a portion of each paycheck to cover their mortgage.

In the results from our calculator, you'll see the option for biweekly payments included for comparison. It's a handy way to see how this payment method stacks up against the traditional monthly payments.

Shorter term loan refinancing

When you take out a new loan to pay off your existing one. By doing this, you can reduce the term of your loan, which often comes with a lower interest rate.

This means you'll pay less in interest overall and can pay off your loan faster.

However, there's a trade-off: opting for a shorter term usually means higher monthly payments. Plus, when you refinance, you'll likely have to pay closing costs and fees.

It's important to weigh the benefits of saving on interest against the potential increase in monthly payments and upfront costs before deciding if refinancing is right for you.

Causes for early repayment

Saving on interest costs

By snagging a lower interest rate, borrowers can pocket some serious savings since interest is often a hefty expense.

Speedier payoff

With a shorter repayment period, you'll hit the finish line faster than originally planned. This means saying goodbye to your mortgage sooner and being debt-free in a flash.

Personal fulfillment

There's nothing quite like the feeling of freedom from debt. Being debt-free not only boosts your emotional well-being but also gives you the green light to splurge or invest in other areas of your life.

Disadvantages of early repayment

Prepayment penalties

These are terms outlined in your mortgage agreement that restrict when and how much you're allowed to pay off your loan early.

Typically, these penalties are a percentage of the remaining balance or a specified number of months' worth of interest.

They often decrease over time and usually phase out within 5 years. However, selling your home and paying off the loan in one go usually doesn't incur a prepayment penalty.

Opportunity costs

While paying off your mortgage early might sound tempting, it's worth considering the potential missed opportunities.

Mortgage rates are often lower than other financial rates, so using your money to pay off a low-interest mortgage instead of investing it where it could potentially earn higher returns could mean missing out on significant opportunities.

Locked-up capital

Any money you invest in your home is money you can't use elsewhere. If you suddenly need cash for unexpected expenses, you might find yourself in a tight spot, forcing you to take out additional loans.

Loss of tax deduction

In the U.S., homeowners can deduct mortgage interest from their taxes, which can lead to significant savings. However, if you pay off your mortgage early and reduce your interest payments, you might lose out on this deduction.

It's important to note that this benefit is only available to taxpayers who itemize their deductions rather than taking the standard deduction.

History of mortgages in United States of America

In the early 20th century, buying a home was quite a feat. You needed to save up a hefty down payment, usually around 50%, and take out a short-term loan, typically three to five years, with a big balloon payment waiting for you at the end.

Under those tough conditions, only four in ten Americans could afford to buy a home. The Great Depression made things even worse, with a quarter of homeowners losing their homes.

To tackle this housing crisis, the government stepped in and created the Federal Housing Administration (FHA) and Fannie Mae in the 1930s.

These agencies aimed to make mortgages more accessible, stable, and affordable. They introduced 30-year mortgages with smaller down payments and set universal construction standards.

These programs were a game-changer, especially for returning soldiers after World War II, sparking a construction boom in the decades that followed.

They also provided crucial support during tough economic times, like the inflation crisis of the 1970s and the energy price drop in the 1980s. By 2001, the home ownership rate hit a record high of 68.1%.

During the 2008 financial crisis, government intervention played a vital role once again. Fannie Mae faced massive losses and was taken over by the federal government, though it bounced back and returned to profitability by 2012.

The FHA also stepped up during the housing market crash, claiming a larger share of mortgages backed by the Federal Reserve.

This move helped stabilize the housing market by 2013. Today, both the FHA and Fannie Mae continue to play active roles, insuring millions of single-family homes and other residential properties, ensuring that home ownership remains within reach for many Americans.