How to use this mortgage payment calculator
Regardless of where you are in the homebuying process, estimating your monthly mortgage cost is a crucial step in determining what you can truly afford and what you're comfortable paying. This tool can help you evaluate different scenarios and figure out the type of loan, term and down payment that's right for your financial situation.
Here's a short step-by-step guide to using this mortgage calculator with PITI:
- Start by entering the mortgage amount. This is the cost of the home minus the down payment. For example, let's say you're considering purchasing a $250,000 home and putting 20 percent down. The mortgage amount would be $200,000. If you have a particular home in mind, use that price as your basis. Otherwise, put in an amount that reflects the range of home prices in the area where you're looking to buy.
- Enter the terms in years. While the most common terms are 15 and 30 years, it's possible to get a mortgage of other lengths. Generally, increasing the length of the mortgage repayment period will decrease your monthly mortgage payment but increase your interest payments.
- Include an interest rate. Base the rate off of current mortgage rates. Keep in mind that rates fluctuate frequently. The rate you receive depends on a number of factors, including your credit score, down payment, property location and more.
- Input your estimated annual property taxes. An estimate of annual property taxes is often included along with the listing of a property, but this info can also typically be found on the property tax assessor's website of the county in which the home is located. Your lender or real estate agent can also provide this information.
- Include your estimated annual homeowners insurance. These rates vary by structure and location, but your mortgage lender or real estate agent can provide an estimate of how much you'll pay annually. Sites like Insurance.com also offer the ability to estimate the cost of homeowners insurance based on different variables.
- Run different scenarios with various mortgage amounts and terms to see how it will impact your monthly payment. Use the prepayment section to discover how prepaying will affect what you pay in interest over the life of the loan.
How to calculate your mortgage payment
If you want to calculate your monthly mortgage payment manually, or simply understand how it's calculated, use this formula: M=P[r(1+r)^n/((1+r)^n)-1)]
- M = the total monthly mortgage payment.
- P = the principal loan amount.
- r = the monthly interest rate. This is the annual rate that your lender provides divided by 12 months.
- n = the number of monthly loan payments. This is the number of years of your loan multiplied by 12.
To see this formula in practice, let's say you're purchasing a $200,000 home with a 30-year loan and putting down 20 percent. The lender offers an interest rate of 4 percent.
To calculate "P," you would first subtract 20 percent from the $200,000 home price to get a total amount borrowed of $160,000.
Then, to calculate your monthly interest rate, or "r," you would divide the annual interest rate by 12. In this scenario, the monthly interest rate would be .0033 percent.
Finally, to get "n," you would multiply your loan term by 12 to get the total number of months for your mortgage, which in this case would be 360.
Your monthly principal and interest payments would be around $763. Homeowners insurance and property taxes are not included.
How much house can you afford?
Lenders typically don't want your home
debt-to-income ratio to exceed 28 percent. To determine your DTI ratio, divide your monthly mortgage payment, including taxes and
insurance, by your gross monthly income. Multiply the result by 100. For example, if your housing expenses will be $2,000 and your monthly household income before withheld taxes is $7,000, your DTI ratio would be about 28.6 percent (2,000 -:- 7,000 x 100 = 28.57 percent).
Before doing business with you, lenders also consider your other monthly debt obligations along with your projected housing expenses. For example, if your monthly expenses include $300 for a car loan, $75 in student loan payments and $125 in credit card bills, you would add these to your $2,000 housing expenses for a total of $2,500. Divide that figure by your $7,000 gross income to arrive at a 35.7 percent ratio. Lenders prefer this so-called "back-end" debt-to-income ratio to be 36 percent or less.
Generally, the smaller your monthly mortgage expense relative to your income, the easier it will be for you to keep up with your payments.
Keep in mind that your monthly payment will increase over the years since taxes and home insurance costs tend to go up rather than down. Financial institutions keep an escrow account to track these and other related costs, such as private mortgage insurance. Lenders provide borrowers with an analysis of the escrow account on an annual basis, showing any projected shortfalls or excess funds for the coming year.
Remember, while lenders can provide you with options for financing a home, they don't have a full picture of your financial life. When considering how much house you can afford, it's important to take into consideration all of your current expenses, upcoming expenses and how you manage your money. It’s not a great idea to borrow the maximum the lender will approve you for. By living below your means, you’ll be able to set aside money for life’s other goals, like retirement and education expenses.
Cut your loan costs by prepaying principal
This PITI calculator offers another feature that can help you cut your loan costs. See how adding additional principal payments can shorten the life of the loan by years. Determine if you could add to your payment on a monthly or yearly basis, or even just one time. Hit "view results" to see a side-by-side comparison of your regular payment schedule versus the prepayment payment schedule.
This mortgage calculator with taxes and insurance will show you just how much you'll be paying in interest for the life of the loan under both scenarios, as well as how much you can save by making extra principal payments along the way.