The average mortgage in the United States is a fraction over $200,000, accounting for more than $10 trillion across the country. It’s the biggest loan you will ever receive, and it’s connected to one of the biggest decisions you will ever make. It’s not to be taken lightly. With that in mind, use mortgage calculator to understand how much you can borrow and how much it will cost you.
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To learn more about mortgage calculations and other essentials, keep reading.
How Are Mortgages Calculated?
A mortgage is calculated based on a set period of time, known as the mortgage term. The longer this period is, the more interest you will pay but the lower your monthly repayments will be.
There are four factors to consider when calculating your mortgage payment:
This is the amount you borrowed, which needs to be paid back in full. In the early days, very little of your monthly mortgage repayments go towards your principle, but the opposite is true towards the end of the mortgage.
This is the amount the lender charges you for taking out the loan. It will account for a sizable portion of your monthly repayments during the early years of your mortgage and is based on the interest rate quoted by your lender.
A mortgage of $100,000 that has a 7% interest rate, will demand total payment of over $200,000 over a 25-year term. That means you’ll pay back more than twice what the house is worth. If you increase the amount to $200,000 and the term to 40 years, you’ll pay back three-times the amount, or $400,000 in total interest.
Taxes are calculated every year but can be paid every month. The lender collects them on behalf of the homeowner and holds them in Escrow until they need to be paid.
There are two types of insurance: Insurance that protects the house and insurance that protects the lender. The former can be taken by anyone while the latter is required for borrowers paying a down payment of less than 20%.
How Much of My Repayment is Interest?
Your very first mortgage repayment is mostly interest, having little impact on your principal.
If you borrow $100,000 over 30 years and have a 6% interest rate, then you’ll pay around $600 per month, $500 of which goes towards your interest. Two years later, you won’t be that much better off and even after 15 years, you’ll still be paying more towards the interest than you will the principal.
That doesn’t sound great, does it? But the good news is that once you pay that interest every month, then any additional payments will go 100% towards the principal. If we use the above as an example, you could pay $100 extra each month, leading to a total payment of $700 and not $600.
This additional $100 essentially doubles the rate at which your principal decreases for the first few years, greatly reducing your overall interest rate and the amount that you will need to pay.
This is true for any additional money that you have—it all helps to reduce your interest and save you a considerable sum of money in the long-term.
When do Mortgage Payments Start?
You will pay your first mortgage payment a month after the day the purchase closed. All mortgage payments are made in arrears, which means you pay for the month previous instead of the month ahead.
As an example, if the sale closes on the 20th of January, then you will make your first payment on the 1st of March. This payment will include the remaining interest for January and the interest for all of February.
How Much Can I Borrow?
There are many things to consider when it comes to calculating how much you can borrow. These include your income, your outgoings, your down payment, dependents, and the mortgage terms. It’s a mixture of affordability, current wealth, and career, but generally speaking, a monthly mortgage payment should not exceed 28% of your income.
If, for example, you make $3,000 a month, then your mortgage payment, including taxes, insurance, and everything else, should not exceed $840. This is something that you can discuss with your broker.
How Much Does a Mortgage Cost?
There are many hidden costs to buying a house, much more than a simple down payment and repayment. You’ll need to make room in your balance for all of the following:
- Application fees: Flat fees that include “origination” fees, credit report fees, and appraisal fees.
- Survey and inspection fees: Performed prior to closing to ensure the house is worth the money being loaned.
- Escrow fee: Paid to the party that oversees the closing.
- Courier fee: For the purpose of transporting necessary documents quickly.
- Local recording fees: Charged by local recording offices to create a public record of the sale.
These “closing costs” can vary and are typically between 2% and 5% of the total loan cost, which means a $100,000 mortgage would levy additional fees of between $2,000 and $5,000.
You have to consider the cost of owning a home as well. If you’ve been renting or living with parents, these can come as quite a shock, especially in the early days:
- Insurance: You’ll want to protect the things in your home from fire, theft, or damage.
- Repairs: You can’t call your landlord if anything breaks and will need to cover the costs yourself.
Improvements: Want new furniture? It’s going to cost you. If you’re moving into your first home and haven’t previously rented, then you’ll have a lot of empty spaces to fill and it can get very expensive very quickly.