What is a mortgage calculator?
In today’s world, buying a home is extremely complicated and confusing, especially for first time homebuyers. There are unexpected fees, taxes, and other things that most homebuyers to not take into account. Therefore, some people find that they are actually not ready to buy a home just yet.
If you are planning to buy a home, you need to ensure that you are financially capable of paying your monthly mortgage payment. One way you can estimate what your monthly mortgage payment will be is by using a mortgage calculator. A mortgage calculator is a tool that will estimate your monthly mortgage payment based on a number of factors.
Components of a Mortgage Calculator
There are many pieces of information you will need to plug into a mortgage calculator for it to give you an estimated monthly payment. Here are all the components of a mortgage calculator:
Mortgage Amount – This is the amount of money that you are going to borrow from the bank. This number is normally calculated by subtracting your down payment from the price of the property. However, it does not include any fees or anything else.
Interest Rate – This is very simply, the interest rate you will be charged. If your interest rate is variable, plug in an average interest rate you think is reasonable.
Loan Term – The loan term is the amount of time it will take you to pay off the loan completely. Most mortgages will come in fifteen, twenty, or thirty year terms.
Taxes – Property taxes is important to fund schools, roads, etc. To guarantee that these taxes get paid, your monthly mortgage payment will include a portion of your property taxes.
Insurance – You should have homeowner’s insurance in case of a fire, theft, or natural disasters. Lenders want to know you plan on protecting the property and may require you pay insurance in order to receive a mortgage loan.
Benefits of a Mortgage Calculator
Now that you know the basics components of a mortgage calculator, what are the benefits of a mortgage calculator? In other words, what does a mortgage calculator do for you?
Estimate your payments: The main reason most people use a mortgage calculator is to estimate their monthly payments. It is important to have a relative idea of what you will need to pay each month on your mortgage so you can appropriately manage your budget.
Offer you a price range of a house: In the event that you find the estimated monthly mortgage payment too high, you can figure out a range of prices that would fit your budget. For example, if you can afford $1,000-$1,200 a month then you can adjust the numbers of the mortgage calculator to figure out the price range that fits your budget. Once you figure that out, you can continue the quest for a new home.
Can help you reduce your payment: If you do not put 20% down on a new home, you will most likely need to purchase private mortgage insurance (PMI). Once you reach 20% equity, you can ask your lender to take off the PMI off of your payment. You can enter in the details of your loan and see if you have reached 20% equity in your home.
Establish if buying a home now makes sense: After playing around with the numbers, you may find out that you currently cannot afford a house. However, after some quick budgeting, you might find that in six months, you will have enough saved to be able to fit a mortgage into your budget.
Can calculate long-term risks: Since the recent housing collapse in 2007, more advanced mortgage calculators can determine the long-term financial risks of purchasing a home. This is especially helpfully for first-time buyers, who are going through a completely new process.
Limitations of a Mortgage Calculator
Despite all the advantages of a mortgage calculator, there are some limitations that you should be aware of. Some of these limitations include:
The calculator can only give you an estimate: There are other factors that will influence how much your mortgage will cost you each month. Therefore, the mortgage calculator can only give you a rough idea of what your payment will actually be.
Your interest rate might change: If you have a variable interest rate, your monthly mortgage payment could change from year to year. Therefore, your payment could significantly increase and actually be out of your budget range. A mortgage calculator just cannot take a variable mortgage into effect because it is unpredictable.
Your credit rating is not considered: It is unlikely you will be able to know your exact interest rate until you actually are accepted for a loan. Your interest rate is influenced by your credit rating and credit history. You might be able to find a general range of interest rates in your local area, but you won’t know your exact interest rate. Therefore, your actual monthly payment may be significantly greater or less then what the mortgage calculator will tell you to expect.
Cannot be adjusted for extra payments: While the calculator can be played with in terms of interest rates and term length, it cannot take into effect any extra money you pay on top of your required monthly payment. If you are confused, consider this example:
You just receive a $10,000 bonus from work. After splurging a little bit and paying off your credit cards, you still have $5,000 left to use. You decide to be safe and put $2,000 and pay an extra $3,000 to your mortgage.
Now, you may be thinking, it’s only $3,000, that might only be one or two percent of the loan. However, that extra $3,000 will most likely have a dramatic impact on what your new monthly payment could be. A mortgage calculator cannot take this into account.
Summary
Despite its’ limitations, a mortgage calculator is still a useful tool for homebuyers or real estate investors. Even though you cannot get an exact monthly payment, you will have a rough idea, which allows you to plan ahead so you do not find yourself in financial turmoil.
If you plan on buying a home in the near future, start playing around with a mortgage calculator. Any financial advisor will tell you that the best thing you can do when applying for a loan is be armed with knowledge. A mortgage calculator will at least provide you with enough knowledge so you know what you are getting yourself into financially. Do not get blindsided by the bank: use a mortgage calculator and prepare yourself.