Starting to Calculate Your Mortgage
People should focus only on the monthly payment, but there are other important features you can use to analyze your mortgage, such as:
- Comparing the monthly payment of several different mortgage loans
- Calculating how much interest you are paying monthly and over the life of the loan
- Aggregating the actual amount you will pay over the life of the loan against the original amount borrowed, to see the excess amount you actually paid
Inputs
Start collecting the necessary information to calculate your payments and understand other aspects of the loan. You need the following details:
- Loan amount (P) or principal, which is the purchase price of the home plus any other fees, minus the down payment
- Annual interest rate (r) on the loan, but be careful as this is not necessarily the qualifying annual interest rate because the mortgage is paid monthly rather than annually, which creates a slight difference between the interest rate and the effective rate
- Number of years (t) you have to repay, also known as the “term”
- Number of payments per year (n), which should be 12 for monthly payments
- Type of loan, for example, fixed-rate or adjustable-rate
- Market value of the home
- Your monthly income
Calculations for Different Loans
The calculation you use depends on the type of loan you have. Most primary mortgages are standard fixed-rate loans. For these fixed loans, use the formula below to calculate the payment. Note that the “^” symbol indicates that you are raising a number to the power shown after the symbol.
Payment = P × (r / n) × (1 + r / n)^[n(t)] / (1 + r / n)^[n(t)] – 1
Example of Payment Calculation
Suppose you borrowed $100,000 at a 6% interest rate for 30 years to be paid monthly. What is the required monthly amount? The monthly amount is $599.55.
Plug those numbers into the formula: {100,000 × (.06 / 12) × [1 + (.06 / 12)^[12(30)]} / {[1 + (.06 / 12)^[12(30)] – 1}(100,000 × .005 × 6.022575) / 5.022575 = 599.55
How Much Interest Are You Paying?
Your mortgage payment amount is important, but you also need to know how much interest is applied to it each month. A part of each monthly payment goes towards covering the cost of the interest, and the remainder pays down your loan balance. Please note that taxes and insurance may be included in the monthly payment, but those are independent of the loan calculations.
Interest-Only Loan Payment Formula
It is easier to calculate loans that are interest-only. Unfortunately, you do not pay down the loan with each required payment, but you can usually pay more than that monthly if you wish to reduce your debt.
Suppose you borrowed $100,000 at 6% using an interest-only loan, and you make a monthly payment. What is the amount due? The amount due is $500.
Loan Amount = Amount × (Interest Rate / 12)
Loan Amount = 100,000 × (.06 / 12) = 500
Calculating an Adjustable Mortgage Payment
An adjustable-rate mortgage (ARMs) features interest rates that may change, resulting in a new monthly payment. To calculate this payment:
Determine the number of months or payments remaining.
Create a new amortization schedule for the remaining period.
Use the outstanding loan balance as the new loan amount.
Enter the new (or future) interest rate.
For example, you have a balance on a mixed ARM loan of $100,000, with 10 years remaining on the loan. Your interest rate will be adjusted to 5%. What will the monthly payment be? The payment will be $1,060.66.
Understand
Your Ownership (Equity) in the Home
It’s important to understand how much of the home you actually own. Sure, you own the home – but until it’s paid off, the lender has a claim to the title, so you don’t have full freedom to act with it. The value of the home that you truly own, known as “your equity in the home,” is the market value of the home minus any outstanding loan balance.
You may want to calculate your equity for several reasons:
- Loan-to-value (LTV) ratio is important, as lenders look for a minimum ratio before approving loans. If you wish to refinance or find out how much of a down payment you will need for your next home, you’ll need to know the LTV ratio. Your net worth depends on how much of the home you actually own. Owning a home worth a million dollars isn’t helpful if you have a debt of $999,000. You can borrow against your home using second mortgages and home equity lines of credit (HELOCs). Lenders often prefer an LTV ratio below 80% for loan approval, but some lenders offer higher LTV ratios.
Can You Afford the Loan?
Lenders often offer you the largest loan they can based on their acceptable debt-to-income ratios. However, you don’t have to take the full amount – and it’s often beneficial to borrow less than the maximum available.
Before applying for loans or visiting homes, review your typical monthly income and expenses to determine how much you want to invest in your mortgage payment. Once you know this figure, you can start talking to lenders and looking at debt-to-income ratios. If you do the opposite (ignore your expenses and only base your housing payment on your income), you might start shopping for homes that are more expensive than you can afford, impacting your lifestyle and making you vulnerable to surprises.
Note: It is better to buy less and enjoy some flexibility each month. Dealing with stress is exhausting and risky, preventing you from saving for other goals.
Source: https://www.thebalancemoney.com/calculate-mortgage-315668
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