Figuring out your budget may not be the most exciting step in the home buying process, but it just might be the most important. Knowing exactly how much house you can afford allows you to purchase a home confidently without worrying about the financial strain down the road.
Unfortunately, planning for a home mortgage isn’t exactly as easy as dividing a purchase price by the number of months you plan to take to pay it off. Thanks to interest and amortization schedules, the calculations are a little more complicated. This home loan calculator can help you with the heavy lifting and give you a better idea of what your financing situation may look like.
Start your home search off on the right foot by looking within your budget. For more information about the terms used on the calculator, refer to the list of definitions below the tool.
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This is the total amount you’re purchasing the home for and will match the sales price on your purchase agreement. This is a good number to play around with, so you can see the upper limits of your possible budget and how much you’ll pay over the lifetime of the loan.
The down payment is the initial payment that a borrower puts up when purchasing a house. Homebuyers will put a percentage of the home’s value down (usually anywhere between 5% to 20%) and borrow the rest from a lender.
Property tax is an ad valorem tax, meaning that it is based upon an item’s assessed value. This means that the amount you pay in property taxes is directly related to your property’s value and is calculated as a percentage. In the United States, taxes are levied on the local level by taxing units such as counties, school districts, cities, and special districts.
Some neighborhoods require that homeowners belong to the HOA, or homeowner’s association. These are private associations most often formed by real estate developers to manage homes in that subdivision. Membership comes with a fee used to pay for amenities, property maintenance, or repairs.
If you anticipate belonging to an HOA, make sure to add that on top of your monthly payment.
This one number actually may consist of two amounts: homeowners’ insurance and private mortgage insurance (PMI).
Homeowners’ insurance is a type of insurance policy that covers damage to your home and your belongings. You may also see the phrase “hazard insurance” used; homeowners’ insurance policies include hazard insurance, but typically cover more than the minimum for hazard insurance. Every homeowners’ insurance policy is different, and it’s very important to ask for an accurate quote from multiple insurance providers. Every insurance company covers natural events, theft, and other damage differently and in different amounts. If you have valuables that you’d like to insure, it’s important to understand how those will be covered as well. Quotes are relatively easy to get—just call some of your local insurance agents and describe your future home (or the types of homes you’re looking at).
Private mortgage insurance (PMI) insures the mortgage lender if you foreclose on your home. If you put down less than 20% as a down payment, your lender may require you to carry PMI. It’s a little harder to obtain this quote, as it varies per lender, but it can vary between .5%-2% of the total loan amount.
The loan term is just another way to say the total length of the loan. The most common loan term is 30 years, but 15-year and 20-year loans have become increasingly common. A mortgage with a longer loan term requires smaller monthly payments paid for a greater period of time. On the other hand, a mortgage with a shorter term will have larger payments, but the borrower will repay the money much sooner.
Your loan term can be an essential factor in what kind of home you choose. If you have a financial advisor, consider talking to them about your long-term plans and how a 30-year term might fit in those goals.
The interest rate is what a lender charges in exchange for letting you take out a mortgage loan. It is calculated as a percentage of the loan balance.
On a traditional fixed-rate mortgage, this percentage will not fluctuate over the loan course. Adjustable-rate mortgages (ARMs), on the other hand, have interest rates that are subject to change. This calculator assumes a fixed-rate mortgage that does not change over time. Several factors determine your loan’s interest rate, including your credit score and history, the house’s location, the loan amount, the size of your down payment, the loan type, and more.
The loan amount is simply how much you are borrowing. This isn’t the house’s purchase price— just the money that the bank lends you. This is your home’s purchase price minus your down payment.
This is your mortgage payment; it covers both principal (the amount originally borrowed) and the interest (the amount of interest you owe per month). Because a mortgage is paid off over decades, the interest you’ll pay in year one is a lot higher than what you’ll pay in year 15.
Amortization refers to the process of paying off debt over time through regular payments that cover both the principal and interest.
The amortization table on the calculator shows you how much goes towards your principal versus the interest with each payment you make. Amortization tables, also called amortization schedules, are based on a specific maturity date (aka your loan term). You’ll notice that less of your payment goes towards interest and more goes towards the principal balance as time goes on.
Keep in mind that this calculator’s amortization table does not account for the extra payments you make. Additional principal payments can reduce the amount of interest you pay and shorten amortization.
All mortgage payments are made of at least two main components: principal and interest. The principal is the amount that you borrow from the bank when you take out your loan. This means that your initial principal balance will equal your loan amount.
As you pay off your mortgage, your principal balance will decrease. Keep in mind that most traditional mortgages, your first payments will consist mainly of interest. As you continue to pay off your loan, more of your monthly payment will go towards your principal balance. This is depicted in the amortization table section of the home loan calculator.
This is the amount of interest you pay every year, over the life of the loan. The more principal you pay off, the lower this number gets.
Once you have a sense of your market’s home prices, you may decide you have a firm handle on your budget. But there is still a lot of work to do before you lock in your rates. Before you get serious about your home search, talk to a lending professional about how best to prepare your budget to purchase a new home.
Loan officers can help you get prequalified for a mortgage and start putting some concrete numbers in place as you begin your search. Even better, a loan officer can help you identify ways to improve your status as a borrower if the house of your dreams is just a little outside of your reach.
The sooner you talk to someone about your finances, the better you can prepare yourself to make this once-in-a-lifetime purchase.
The most important factor in all of this is simple: does it fit into your budget? Whether you’re not sure where to start with your budget or you’re looking for tips to level up your skillset, you can check out our blog posts on Money Management for more helpful articles! We want to provide you the kind of financial advice you need to accomplish your goals.
This calculator is for illustrative purposes only and based on information provided by the user. Accuracy is not guaranteed. All loans are subject to approval. Your actual rate, terms and fees may vary. Your Monthly Payment calculations reflect only principal and interest, and amounts for taxes and insurance, if applicable, may increase your actual payment.
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