How To Calculate Your Mortgage, And How It Can Help You Save Money Long-Term
Kevin Graham14-minute read
November 18, 2021
You may be thinking about purchasing a house or refinancing the one you’re already in. This decision brings with it a number of questions: What kind of interest rate can I get? What kind of payment should I expect? How much money can I save by paying off the loan before the end of the term?
In this article, we’ll show you how to calculate your mortgage payment by breaking down the formula for you. We’ll also show you how the variables that go into the equation work, reviewing some ways in which you might save some money and feel better prepared for the future. Lastly, we’ll walk you through a few different calculators and their uses.
How Do I Calculate My Mortgage Payment?
There are two ways to go about calculating a monthly mortgage payment. You can go old-school and figure it out using a complicated equation, or you can use a mortgage payment calculator. Either way, you’ll need to know several variables, so let’s run through them:
- Loan amount. If you’re buying a home, you’ll want to put in the price of the homes you’re looking at and subtract your down payment. If you’re far enough along, you may be able to also add any costs being built into the balance. For a refi, include the expected balance after you close.
- Interest rate. You want to look at the base rate and not the annual percentage rate (APR). You use the lower base mortgage rate because your monthly payment doesn’t reflect closing costs. Knowing APR is still useful, but the context of the overall cost of the loan as opposed to monthly expenses is key.
- Loan term. This is how long you have to pay the loan off. Longer terms mean smaller payments, but more interest paid. Shorter terms have the opposite properties.
- Mortgage insurance. If you make a down payment of less than 20%, you’ll have private mortgage insurance (PMI) on a conventional loan. This payment is based on a percentage of the loan amount, and protects the lender in case you default. The rate is based on down payment or equity amount and credit score as well as loan type and occupancy. You can request removal on a one-unit primary residence once you reach 20% equity in most cases. Certain government-backed options like FHA loans, VA loans and those from the USDA have mandatory upfront and annual mortgage insurance or guarantee fee payments that may last for the life of the loan – depending on the loan type and down payment amount or existing equity. Depending on your down payment amount, mortgage insurance premiums may be built into the calculations.
- Property taxes. Since property taxes are often built into your mortgage payment, having a fairly accurate estimate will help you get a better picture of cost. Regardless of whether you have an escrow account, these need to be accounted for as a cost of ownership.
- Homeowners insurance. Mortgage lenders will require you to carry homeowners insurance to protect their investment. If you have an escrow account, the overall premium is split into monthly payments. Even if you don’t, you still need to include this as a homeownership expense.
- Homeowners association (HOA) fees. These aren’t typically included in your monthly mortgage, even if you have an escrow account. However, it’s important to factor in these monthly and annual fees. The HOA fees also impact what you can qualify for when you’re looking to purchase or refinance a home.
Formula For Calculating Mortgage Payments
As mentioned above, the easiest way to come to your mortgage payment is to use a mortgage calculator. If you’re interested in putting together an amortization schedule that can tell you what your payment is at a specific point, there are built-in formulas in spreadsheet programs that can help you.
However, having a basic understanding of the formula can give you an idea of how changing variables impacts the other parts of the equation. Let’s take a quick look.
M = P [ I(1 + I)^N ] / [ (1 + I)^N – 1]
This formula will help you calculate your mortgage payment based on the loan principal and interest before taxes, homeowners insurance and HOA fees. If it looks a little intimidating, though, you’re probably not alone – let’s break it down variable by variable so it’s easier to understand:
- Monthly payment. This is what you’re solving for.
- This is the loan balance, or what you’re trying to pay off.
- Interest rate. Remember, you’ll want to use the base interest rate and not the APR. Additionally, because the mortgage interest rate you’re charged is an annual interest rate that does represent the interest that’s supposed to be paid over the whole year, you want to divide this by 12 to get the monthly interest rate.
- Number of payments in the loan term. For instance, if it’s a 30-year mortgage with monthly payments, there are 360 payments.
As a practical matter, you’re much better off using a mortgage calculator, because it’s very hard to even input that formula properly in a regular calculator.
There are some special situations where a spreadsheet formula might be useful. For instance, mortgage calculators tend to assume a fixed-rate mortgage.
If you have an adjustable-rate mortgage (ARM) where the rate changes over time, you can set up an amortization table using the PMT function in Microsoft Excel and change the formula at a point so that the rate and time remaining reflect the new terms once the interest rate adjusts.
Having your own formula set up also gives you the opportunity to compare different payment scenarios, including interest-only payments versus fully amortizing loans.
As mentioned before, this covers principal and interest, but you can add in taxes and insurance once you know them to get to your total monthly payment. A lender will qualify you using these four payment factors (sometimes shortened to the acronym “PITI”. Where applicable, HOA fees are added in, and the acronym becomes “PITIA,” with the “A” standing for “association dues.”
3 Types Of Mortgage Calculators
There are a few types of mortgage calculators that can prove helpful depending on your situation.. Let’s go over the basics on each of them, before digging a little deeper on the info you’ll need to make the most use of each calculator.
1. Purchase Calculator
If you’re looking to buy a new home, our purchase or home affordability calculator can help you run the numbers.
Using this calculator, you can do two things: You'll either be able to figure out how much cash you need for a down payment, or you can work things the other way and figure out how much you can afford based on your down payment as well as your monthly income. There's also a credit estimate, which is important in determining what products you might qualify for.
2. Refinance Calculator
What if you’re not looking to move to a new place, but instead looking to refinance your current home? There’s a calculator for that, too.
The first question a refinance calculator will ask you is what your goal is with a refinance. For example, you might wish to lower your existing loan payment, pay off your mortgage faster or take cash out.
It’s also useful to know how much you owe on your existing mortgage, and an estimate of your home value. This helps with determining how much equity you have if you want to take cash out.
We also have a home equity calculator that helps you determine how much cash you can take out.
3. Amortization Calculator
Amortization refers to the schedule that determines how much of your payment goes toward paying off principal and how much goes toward interest. At the beginning of a loan, more of your payment goes toward paying interest than paying down your principal. The opposite is true at the end of the loan.
What’s pretty cool though is that you can pay extra on your monthly mortgage payment and have that amount applied to your loan’s principal balance. By doing so, you can pay down the principal faster to save on the interest payment.
The purpose of any mortgage amortization calculator is to show you just how much interest and how many months of payments you can save by putting some more money onto your principal payment.
The amortization calculator asks you to input your current loan amount, the length of your loan, your interest rate and the state you live in. You can also see what the effect of a one-time, monthly or yearly additional payment would be on your number of monthly payments or interest.
The results show a sample monthly payment (excluding taxes and insurance) and the interest you would pay. If you’ve chosen to add an additional payment, it shows you how much interest and how many months of payments you could save by putting extra money toward paying down your principal. There’s also a graph that breaks down how much of your payment goes toward principal and how much goes toward interest.
What Can A Mortgage Calculator Help Me With?
Whichever mortgage calculator you use, its objective should always be to help you feel more informed on how to get a mortgage and your budget for buying a home, or to decide whether to move forward with a refinance. It all depends on your lifestyle and personal goals.
Below are some of the questions a mortgage calculator can answer.
The Length Of A Home Loan Term
The loan term refers to how long you have to pay off a loan. Shorter terms mean higher monthly payments with less interest. Longer terms flip this scenario, meaning more interest is paid, but the monthly payment is lower.
When you’re looking at monthly payments, it’s important to balance dueling goals of affordability while at the same time trying to pay as little interest as possible.
One strategy that might be helpful is to put extra money toward the monthly principal payment when you can. This will result in paying less total interest over time than if you just made your regular monthly payment.
You can also take a look at recasting your mortgage to lower your payment permanently. When you recast, your term and interest rate stays the same, but the loan balance is lowered to reflect the payments you’ve already made. Your payment is lower because the interest rate and term remain.
One thing to know about recasting is that sometimes there’s a fee, and some lenders limit how often you do it or if they let you do it at all. However, it can be an option worth looking into, because it might be cheaper than the closing costs on a refinance.
The Best Home Loan Option For You
Any good calculator will help determine what might be a good loan product for you based on what you might qualify for. You’ll usually see several options.
It’s worth noting that you must qualify, so don’t take what the mortgage calculator says as gospel. A Home Loan Expert will better be able to tell you what you qualify for when they take a more detailed look at your financial history. However, it does give you a starting point in terms of things to think about.
Whether The Home Is Too Expensive
Another thing a mortgage calculator is very good for is determining how much house you can afford. This is based on factors like your income, credit score and your outstanding debt. Not only is the monthly payment important, but you should also be aware of how much you need to have for a down payment.
As important as it is to have this estimate, it’s also critical that you don’t overspend on the house by not considering emergency funds and any other financial goals. You don’t want to put yourself in a position where you’re house poor and unable to afford retiring or going on vacation.
Determining The Right Down Payment Amount
A purchase calculator can help you determine the down payment you need. There are minimum down payments for various loan types, but even beyond that, a higher down payment can mean a lower monthly payment and the ability to avoid mortgage insurance.
On the flip side, a higher down payment represents a more significant hurdle, particularly for first-time home buyers who don’t have an existing home to sell to help fund that down payment. The calculator can show you options so that you can balance the amount of the down payment with the monthly mortgage payment itself.
If You Should Rent Vs. Own A Home
There are many advantages to owning a home versus renting. Among them is the fact that you gain equity with each payment, as opposed to giving your money to a landlord. As an owner, you also gain the ability to paint your living room any color your desire.
However, there’s a mathematical piece to this as well. You have to know how much you need for a down payment, and whether owning a home will be cheaper or require you to pay more when looking at the monthly cost of homeownership.
In many cases, it’s better to get a mortgage, because the rate can be fixed for the life of the loan. There are very few controls that can stop landlords from raising your rent every year if they want to. However, not every situation is the same.
Information For Home Purchase Mortgage Calculators
Although they’re alike in some ways, purchase and refinance calculators certainly have differences. Here’s what’s typically included in a home purchase calculator.
Sales price is important. From this, you can get the down payment you’d need. If it’s high enough, you might need a jumbo loan, which could also factor in your decision. Qualifications for jumbo loans can be a bit more stringent due to the higher loan amount.
Another question a purchase calculator might ask is how much you’ve saved for a down payment, either as a flat amount or as a percentage of the home price. This is among the biggest limiting factors of how much you can afford. Depending on the type of loan you’re trying to qualify for, you could need a down payment as low as 3% or as high as 25%.
A higher down payment also means a better interest rate; you have more invested in the home which signals less risk for the lender. Lenders look at loan-to-value ratio (LTV) to judge risk. You can think of LTV as the inverse of a down payment. A 20% down payment or equity amount means an 80% LTV.
Estimated Credit Score
Your estimated credit score gives lenders a look at your qualifications as a borrower. The higher your score, the better your history and the better your rate.
One thing that’s worth noting is that when lenders look at your credit score, they qualify you with the median score among the three major credit bureaus (ExperianⓇ, TransUnionⓇ and EquifaxⓇ). If you happen to know of a variation, try to pick somewhere in the middle. However, this may not be as much of a concern, because you’re just picking a credit score range at this point.
Along with the down payment, your income is probably the single biggest factor helping determine how much you can afford. In general, it’s a good idea to spend no more than three times the combined income of all borrowers on the loan on a house. However, mortgage lenders look at debt-to-income ratio (DTI) as a more official metric.
Your DTI is a comparison of your monthly debt payments on such assets as a house, student and car loan bills and minimum credit card payments. To qualify for the most options, your DTI should be no more than 43%.
The higher your income, the more money you can theoretically allocate to ongoing debt payments. Given this, you’ll be able to afford more.
The other half of the DTI equation is existing debt. The less debt you have before taking on a mortgage, the more you can afford in terms of your house. This also has an impact on your interest rate, depending on the type of loan you’re getting.
In a purchase transaction, knowing the ZIP code can help a lender to know exactly what the expected real estate taxes and homeowners insurance premiums might be in the area. They can use this information to help clients get a more accurate estimate of their payment.
Depending on the sophistication of the calculator, this might also be used to get a more accurate picture of closing costs based on factors like local title insurance costs, recording fees and appraisal charges in the area.
If you’re looking at a property that’s subject to HOA fees, you should add these into your calculated payment along with anything you know about taxes and insurance. The fees are used as part of determining whether you can qualify to make the monthly payment, even if they’re separate from the mortgage payment itself.
Because the HOA often has broad powers to do things like put a lien on your property if you don’t pay your dues, it’s in the interest of you and any potential mortgage lenders to make sure you can afford them.
Information For Refinance Mortgage Calculators
Ultimately, refinance calculators help you determine whether a new mortgage loan makes sense. Let’s run through them.
Instead of the sales price, what really matters for a refinance calculator is a value estimate. Although this usually has to be confirmed by an appraisal or other home valuation method depending on the type of loan you’re getting, it does give you a starting point to help determine how much equity you have in your home in combination with your existing mortgage balance, if any.
Equity is important, because it’ll determine what options you qualify for along with whether and how much cash you can take out – if that’s one of your goals with the refinance.
As with a purchase, the higher your credit score, the better. This is true both in terms of loan options and the opportunity for lower interest rates.
Current Mortgage Balance And Payment
Together with your home value estimate, your current mortgage balance is used to determine how much equity you have for the purposes of loan qualification as well as to figure how much cash you can take out.
The payment can be useful, because sometimes the reason for refinancing is to try to lower your payment – usually accomplished either through lowering your rate or lengthening your term. Including this info will make it easier to compare options.
As with a purchase calculator, your other debt is important in a refinance transaction because it helps get to an accurate estimate of your overall DTI and what you might qualify for.
However, one of the reasons for doing a refinance would be to take cash out to do a debt consolidation. In that case, the inclusion of your other debt could help give you a point of comparison to see how much you might save by rolling higher-interest debt into your mortgage.
How Long You’ll Stay In Your Current Home
When you refinance, there are origination and other closing costs associated with taking out the new loan. Because of this, it’s important to have a decent idea of the number of years you might stay in the home.
Your time in the home will help you calculate the breakeven point and determine whether it’s worth it for you to do the refinance. For instance, if it takes you 2 years to break even in payment and interest savings after paying closing costs, you know you have to stay in the home longer than that for the refi to make sense.
The key here is to have an idea of your situation. If you have some sense of what your future plans might be, then you can sit down and do the math.
Your ZIP code is useful in a refinance calculator for helping determine what your closing costs might be. Title insurance and appraisals still come into play under certain circumstances on a refinance.
The Bottom Line: Mortgage Calculators Can Help You Decide How Much House You Can Afford
Mortgage calculators are great for giving you an estimate of what you might expect when purchasing or refinancing a home. While not an official qualification, the act of using a calculator is a nice starting point.
If you’re ready to take the next step and get started, you can do so online with Rocket Mortgage®.
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