Understanding Mortgage Math: How to Use a Mortgage Calculator

For many of us, buying a home is one of the biggest financial decisions we make in our lifetime. Understanding what goes into a mortgage payment, and the math involved in the mortgage process will help you make more informed decisions throughout your home-buying journey and beyond.

Whether you’re a first-time homebuyer or a seasoned real estate investor, when you choose to buy a home you may be asking yourself questions such as: How much does the interest rate impact what my mortgage payment will be? How are property taxes baked into my monthly mortgage payment? How much can I afford to borrow? Answering these types of questions is where a mortgage calculator comes in handy.

What is a Mortgage calculator?

A mortgage calculator is a digital tool that allows you to estimate your monthly mortgage payment based on key variables such as loan amount, interest rate, property taxes, insurance, term, and other costs. After inputting these details, the calculator will give you a clearer picture of what you can expect payment-wise and how much you can afford to borrow for your mortgage.

Key Components of Mortgage Calculations

Loan Amount: This is the amount you borrow from the lender to purchase your home after subtracting your down payment. This amount also represents the “principal” balance of your mortgage.

Interest Rate: The percentage charged by the lender in exchange for borrowing the funds used to purchase your home. Interest rates can be either fixed or variable depending upon the loan program you choose and will vary based on other factors such as your credit score, down payment amount, and the mortgage market at the time of your purchase.

Loan Term: This represents the length of time you will be repaying the loan. A 30-year term is most common, but other options such as 15 or 20-year terms are also available. Your Loan Officer will work with you to determine what program and term makes the most sense for your unique financial and personal situation.

Property Taxes: The amount you will be required to pay in annual property taxes is determined by the tax-assessed value of the property you plan to purchase, along with a few other factors such as location and market value. Typically, the annual property tax amount is broken into 12 monthly payments and included as part of your monthly mortgage payment. These payments are held in an escrow account and paid annually automatically on your behalf.

Homeowners Insurance: Whether it’s a broken pipe, hail storm or a fire, homeowners insurance exists to cover potential damages to your home. Just like with property taxes, your annual homeowners insurance amount varies based on your home’s location and value and is split into 12 monthly payments and included as part of your monthly mortgage payment.

Private Mortgage Insurance: This exists to protect the lender in case of default on the mortgage loan. Private Mortgage Insurance, or “PMI” as it is often called, is commonly required on loans where the down payment is less than 20% of the home’s purchase price. Ask your loan officer if the type of loan you are looking at requires PMI. When required, PMI is baked into your monthly mortgage payment and paid until you’ve built up 20% equity in your new home, either via market value appreciation (appraisal required) or paying down your mortgage amount.

How to Use a Mortgage Calculator

Now that you understand what goes into a mortgage payment calculation, using a mortgage calculator should be more straightforward. Follow these steps to get started:

Gather your information: The more information you can provide, the more accurate your calculations will be. Collect details about your loan amount, interest rate, term, taxes, and insurance costs. When you work with a Summit Loan Officer, they can help you determine some of these factors that you may only have estimates on such as your credit score and the interest rate you qualify for.

Input your loan details:

• Loan Amount: Enter the loan amount you plan to borrow.
• Interest Rate: Input the current interest rate for your desired loan type. This can be an estimate.
• Loan Term: Choose your desired term length (15, 20, 30 years).

Include Additional Costs:

• Property Taxes and Insurance: Input your annual property taxes and homeowners insurance premium. Many online mortgage calculators can estimate these based on your home’s purchase price and zip code.
• Private Mortgage Insurance: If applicable, include the monthly PMI amount.

Review the results: The calculator will provide an estimate of your monthly mortgage payment, breaking down the principal, interest, taxes, and insurance (PITI).

Benefits of Using a Mortgage Calculator:

Using a mortgage calculator can help you get a comprehensive view of what you’ll be paying for your mortgage each month and help with budgeting during the home shopping process by letting you know how much you can afford to borrow. Mortgage calculators also serve as a valuable financial planning tool by showing you how changes in loan terms and rates may impact your mortgage payments, helping you plan for future financial scenarios.

Now that you understand the components of mortgage math and how to effectively use a mortgage calculator, you are well on your way to becoming an informed homebuyer.

Ready to get started? Put your new knowledge to the test by trying out the Summit Mortgage Calculator. Then, if you haven’t already, find a Summit Loan Officer to guide you through the home-buying process.