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How to Use a Mortgage Calculator

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Mortgage calculators are a powerful tool to help you see the dollars and sense of applying for a mortgage. They can help you with decisions about renting versus owning or how much of a monthly payment you can afford. They also allow you to compare payments on a variety of available mortgage types.

However, the calculators are only as accurate as the information that’s entered, making it important to understand how to use one efficiently.

We’ll cover the benefits of different mortgage calculators in this guide on how to use a mortgage calculator.

What is a mortgage calculator?

A mortgage calculator helps you make mathematical calculations related to a home loan.

Mortgage calculations used to be made by inputting numbers based on complex formulas on a hand-held calculator, but online mortgage calculators make the process much simpler by doing that math for you.

The most important things you need to know when using a mortgage calculator are how it can help you, what information you’ll need to input and what the results mean.

How a mortgage calculator can help you

Before we discuss how to use a mortgage calculator, it’s important to understand how a mortgage calculator can benefit you. You may need to use more than one type of mortgage calculator to get the desired information.

Unlike a hand-held calculator, online calculators are designed to help with specific decisions. Here are some of the questions that mortgage calculators may help you answer:

 

  • What your monthly mortgage payment will be: This is the most common reason to use a mortgage calculator, since they are designed to give you an idea of what your monthly payment will be for a variety of different loan types and scenarios. There are calculators to determine the payment for a mortgage to buy a home or to refinance the loan on a home you already own.
  • Whether you should rent or own a home: If you are renting but are starting to consider buying a home, a rent versus own calculator will help you see where your money goes over time when you pay rent. It also shows you what the tax benefits of homeownership will look like versus continuing to rent.
  • How you’ll save by consolidating debt with a mortgage: If you are already a homeowner, you’ll usually build up equity in your home over time. Home equity is the difference between your home’s value and your current loan balance. If you have enough equity, you may be able to access some of it with a home equity loan, home equity line of credit (HELOC) or cash-out refinance.
  • How long it will take to recoup closing costs: When you take out a mortgage, there are always closing costs. If you’re considering a refinance of your current mortgage to save money on your monthly payment, you need to know what the breakeven on your refinance will be. A cost breakeven determines how many months it will take you to recoup the costs you paid for a mortgage.
  • What your payment will be on government programs: There are different loan programs offered by government agencies, like the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). Government loans have specific types of insurance and fees associated with them. If you’re eligible for either of these, you’ll want to use a mortgage calculator that adds the fees in so that you get an accurate accounting of your loan amount and monthly payment.

What you’ll need to get the most out of your mortgage calculator

With any type of mortgage calculator, the quality of information you get is only as good as the quality of the information you input. You’ll need to gather different information depending on whether you’re looking to buy a home, refinance a home or apply for an FHA or VA loan.

Information you may need for homebuying mortgage calculators

  • Sales price: Even if you don’t have a home picked out, you’ll need to enter a price based on houses that you’ve seen in person or online, with the features you think you might want in a home.
  • Down payment: Many mortgage calculators are set to a 20% down payment. Make sure you enter a down payment that is realistic based on how much you have in the bank, your 401(k) and how much you can get a family member to gift.
  • Estimated credit score: Mortgage rates are influenced by your credit score, and a calculator will pick a rate based on a credit score or range of credit scores you select. If you’re buying a home with less than a 20% down payment, you may need private mortgage insurance (PMI) for a conventional loan. The lower your credit score, the higher the PMI portion of your payment will be.
  • Current rent: This information is necessary for rent-to-own calculators. It gives you an idea of whether your new mortgage payment will be significantly higher.
  • ZIP code in the area you intend to buy: Interest rates vary by location, and mortgage calculators will provide you with estimated rates based on your input. There may be areas that have maximum loan limits depending on the type of loan you’re seeking, so knowing the ZIP code will keep you from buying more home than the loan limits allow.
  • Marginal tax rate: You might need to call your tax preparer for this, but knowing it will give you an idea of how much tax benefit there is for you to buy versus rent. Being able to write off mortgage interest may result in a bigger tax refund or a bigger take-home paycheck if you adjust your withholding to compensate for your mortgage interest write-off.
  • Homeowners association (HOA) fees: If you’re buying a condominium, townhome or a home in a planned unit development, you may need to pay HOA fees. These fees may cover the cost of maintaining the roads in your neighborhood or for access to features such as on-site gyms, rooftop terraces, doormen and other features that require expenses.

Information you may need for refinance mortgage calculators

  • Estimated value: When you’re refinancing, one of the hardest things to do is figure out what your home is currently worth. You can use a value estimator to get an idea or contact the real estate agent that helped you buy your home to provide you with a market analysis of the homes in your area.
  • Credit score: Your credit score is important on a refinance transaction for determining your rate. On some types of loans, such as home equity loans and HELOCs, it’ll help determine how much equity you can tap compared to your value. This is referred to as loan-to-value, or LTV.
  • Current mortgage balance and payment: Refinance calculators will ask for this to determine how much is going to be paid off, and the payment will help you see how much you’re saving. You should be able to get the loan balance from the mortgage statement you receive in the mail or online with your current mortgage company.
  • Payments and balances on other debt: If you are taking out extra cash with a refinance, home equity loan or HELOC to pay off other debt such as revolving credit cards or auto loans, you’ll want to have the monthly payments and balances on the debt you plan to pay off. With that information handy, you’ll see how much you’ll save with the new payment versus your current debt.
  • Date you took out your old loan and your current interest rate: This might seem like an odd request, but it’s very important to determine an accurate cost breakeven. If you’ve had your loan for awhile, you’ve already paid off a portion of the loan. You’ll want to calculate money you’ve already paid into your current loan, especially if you’re starting over with a new 30-year mortgage for your refinance.
  • How long you’ll stay in your current home: When you’re refinancing, one important thing to measure is how long it will take to recoup the costs. A breakeven calculator will help you determine if the refinance makes sense based on how long you plan to stay in your current home.
  • ZIP code: As is the case with a purchase, your loan amount may be limited depending on what type of refinance loan you are applying for in different areas of the country.

How to use a mortgage calculator for a purchase

Rent vs. buy

Before you start crunching numbers on homeownership, you need to look at the benefit of renting versus owning. A big part of this will require a good grasp of how much money you can put down on a house.

The less you put down, the higher your mortgage payment will be — but you’ll also need to have a good idea of how much rents go up every year. One of the drawbacks to renting a home is your landlord can increase the rent every year. In some places, there are no limits on how big the increases can be. (You can look at average rent increases across the country here.)

The other big factor to consider with a rent versus buy calculator is how long you plan to live in your home. If you make a large down payment, it will take longer to recoup the cost versus renting. However, every payment you make on your mortgage will pay down your loan balance, whereas rent payments only benefit the owner of the home you’re renting.

While the financial aspects of homeownership are important to consider, there is also an emotional investment many people make when buying a home. The freedom to paint your walls any color you want or watch your kids grow up with friends in the neighborhood can influence the decision to purchase a home more than the results of a rent versus buy calculator.

Home affordability

Once you’ve taken an honest look at buying versus renting, it’s time to take an honest look at what’s affordable. Besides your credit score, one of the most important factors lenders consider when determining if you can repay a loan is your debt-to-income (DTI) ratio.

DTI is a measure of how much total debt, including your mortgage payment, you have compared to your before-tax income. In most cases, lenders prefer to keep this ratio below 43%, but you won’t have to make the calculation if you use a mortgage calculator — recommended DTIs are built in.

Some calculators, such as our Home Affordability Calculator, also provide you with a calculation of what’s left over each month based on your take-home pay. This can be valuable information to figure how much money you’ll have for other expenses such as your cellphone, cable, electric, child care, groceries — all expenses that you pay every month but lenders don’t consider when approving your loan.

The calculator will produce a recommended maximum sales price based on your down payment and income. Make sure you compare the payment to what you’re paying now for rent. Most lenders recommend that you don’t take on a house payment that represents more than 28% of your total income. For example, if you make $5,000 a month, your monthly mortgage payment should stay below $1,400.

How to use a mortgage calculator for a refinance

There are many calculators that will help you decide whether a refinance makes sense.

Refinance breakeven

The most common reason to refinance is to lower your monthly payment by getting a lower interest rate. However, every refinance loan has associated closing costs, even if they are advertised as no-cost refinances.

One of the best ways to determine if a refinance makes sense is to use a refinance breakeven calculator. You’ll start by gathering the data mentioned above, including your home’s value, current mortgage balance, when you took out the loan, the term of the loan and your interest rate.

You can get a quick look at current rates that might be available, then input a rate that looks good into the calculator. There should be a place to add a percentage for closing costs — 2% is a good place to start, although costs may be higher or lower depending on how your lender is quoting your closing costs. The next — and most important — number to enter on a breakeven calculator is how many years you plan to stay in your home.

Once you’ve entered that information, you’ll get an idea of the savings — and how many months it will take to recoup. If you can’t recoup your costs in the remaining time you’ll be in your house, the refinance doesn’t make sense.

Home equity

One of the great benefits of homeownership is being able to build equity in your home. Home values tend to increase over time, and each mortgage payment reduces the balance of your loan.

You can access your home equity by getting a home equity loan or HELOC. A home equity calculator gives you an idea of how much equity you can take out based on the estimated value of your home, your current balance and your credit score.

Usually you’ll be limited to around 80% of your home’s value, but you don’t have to stress about the calculations because the calculator will have the limits built in.

Cash-out refinance

One of the drawbacks to home equity loans and HELOCs are that they often come with higher interest rates than first mortgages. They are considered second mortgages, which means they are second to your current mortgage.

If you want to avoid the confusion of first and second mortgages but want to access some of your equity, you can do a cash-out refinance. This type of refinance replaces your current mortgage with a new mortgage that is bigger than your loan balance, then you pocket the difference.

A cash-out refinance calculator will give you an idea of how much you can take out based on your home’s current value, your loan balance and how much cash you want to take out.

How to use mortgage calculators for government loan programs

Government loans are backed by the U.S. to provide easier qualifying options for current and aspiring homeowners. FHA and VA loans are the most common government loan programs, and we’ll discuss the importance of using a mortgage calculator made just for these programs.

VA loans

The most competitive government mortgage loan program is offered to veterans of the military through the VA. Veterans and active-duty service members can apply for a loan with no down payment, no minimum credit score requirement and no mortgage insurance premiums. If you’re refinancing, the VA allows you to borrow up to 100% of the value of your home or refinance to reduce your rate with no income or appraisal required.

VA loans do require a funding fee, which is charged to some veterans and varies based on down payment and whether the veteran has used VA loan benefits before. Disabled veterans may be exempt from the funding fee.

If you are eligible for VA financing, it’s important to use a VA mortgage calculator, because it is designed to take the special qualifying features of VA loans into consideration. For example, a regular mortgage calculator will likely assess mortgage insurance if you input less than a 20% down payment — and won’t add in the funding fee.

FHA loans

FHA-approved lenders can lend to borrowers with credit scores as low as 500 with a 10% down payment and scores as low as 580 for a 3.5% down payment. First-time homebuyers often choose FHA loans because of the flexible lending guidelines.

One of the big differences between FHA loans and other types of home loans is that mortgage insurance is required regardless of your down payment. There are two types of mortgage insurance involved in FHA lending: an upfront mortgage insurance premium paid as a lump sum and an annual mortgage insurance premium paid as part of the monthly payment.

Because the upfront premium is usually added to your loan amount and the annual premium is calculated on top of that, it can be hard to manually calculate the total for which you could qualify. An FHA mortgage calculator does the mortgage calculations for you so that you can see what your total payment is with the correct mortgage insurances added.

If you already have an FHA loan, you may be eligible to borrow up to 85% of your home’s value and take cash-out, or reduce your interest rate without needing any income documentation or an appraisal.

Final thoughts

When you’re considering buying a home that requires a mortgage or thinking about a refinance, you’ll get the most accurate answers when you speak to a loan officer. Loan officers have the education and experience to walk you through the process and provide you with options to help you achieve your mortgage financing goals.

However, it’s good for you to have a basic knowledge of how mortgage numbers work before you fill out a loan application so that you’re equipped with the information you need to make good financial decisions about the complex world of mortgage financing.

Learning how to use different mortgage calculators will help you see how a mortgage payment is impacted by down payments, credit scores and different loan programs, helping you to make the most informed decisions.

 


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