Understanding mortgage is essential in making better financial decisions.
And, an organized approach to calculate mortgage payment becomes more important, when you are planning to buy a new house or property.
What benifits you the most:
By carefully following genuine mortgage practices, you can not only save you money but this also secures you against unwanted damages or liabilities that may arise in the future.
In general, most people only focus on mortgage monthly payments.
True: But, but there is a lot more to consider before applying for a home loan.
There are several crucial factors you must understand to properly calculate the mortage net total value.
This article details on:
- How to calculate monthly payments for fixed-rate mortgage and adjustable-rate mortgage.
- How to calculate average interest payable till loan pay-off date.
- What Shall be your claims on property?
And the essential requirements, necessary to qualify for a mortgage loan.
Moving forward we're going to dig deep into how to properly calculate mortgage payment, but feel free to jump to any section that interests you:
What is Mortgage
a Mortgage is a long‐term home loan designed to help purchase a property or a real estate.
The acquired mortgage is then repaid with interest in monthly payments over a period of time, extending up to 30 years.
The main factors that determine the monthly mortgage payments are the overall net worth and the term of the loan.
The net worth includes the principal and applicable interest at which the loan was agreed to be borrowed. While the term is the length of time under which the loan is meant to be repaid back.
Considering the exact value and life of the mortgage, the portion of each payment that represents the principal amount increases and likewise the portion of interest decreases.
In general, the longer your mortgage term, the lower your monthly payment are.
Understanding Basic Mortgage Functions
There are a set of elements that you require to calculate mortage payment. To begin with, let's consider the major fundamentals:
Mortgage Value: or Home Price/Value is the estimated market value of what your home is worth.
(Principal) Loan Amount: is the value of loan dispersed to you, usually, equivalent to the outstanding balance of your mortgage. This will be the home price minus thedown payment.
Down Payment: is the initial upfront deposit made in cash. usually,, it's 20% of the total home value.
Interest Rate: is the amount of interest due per date. Not to be confused with (APR) annual percentage rate which is actual yearly costs over the term of the loan.
Mortgage Repayment Term: is the number of years during which you will be making payments. It's advised to choose shorter payment terms, to make your house cost less.
Calculating Payment for Fixed-Rate mortgage
Calculating mortgage payment depends on the type of loan that you may apply for.
About 73% of all home loans are fixed-rate mortgages.
Fixed rate mortgages are loans in which the subjected interest rate remains the same throughout the term of the mortgage.
The most common repayment terms are 10 to 30 years mortgages, with the 30-year mortgage being the most preferred choice as it tends to offer the lowest monthly payment applicable.
The only downside is:
Long term fixed-rate mortgages tend to have a higher interest rate than short term loans.
Formula to calculate mortage payment in fixed rate loans:
Loan Payment = Amount / Discount Factor
or
P = A / D
Integrating the following elements:
- The number of Annual Payments (n) = Total payments made per annum times the total duration of loan.
- Periodic Interest Rate (i) = Annual rate divided by number of payments per
- Discount Factor (D) = {[(1 + i) ^n] - 1} / [i(1 + i)^n]
Assumption: Suppose Mr. A borrows $100,000 at 6 percent per annum for a duration of 30 years. What will be the net average monthly payment (P)?
n = 360 (12 monthly payments per annum times 30 years)
i = .005 (@6% per annum is expressed as .06, divided by 12 monthly payments per year)
D = 166.7916 ({[(1+.005)^360] - 1} / [.005(1+.005)^360])
P = A/D (100,000 / 166.7916 = 599.55)
The net average monthly mortgage payment will be $599.55
Fixed-rate mortgage loans tend to be more secure than the adjustable rate mortgage. The risks are usually, centered around the applicable interest rates.
Calculating Payment for Adjustable-Rate Mortgage
Another type of home loans is adjustable-rate mortgages. These are loans offered at the market standard variable base rate and are subject to changes with respect to market trends.
Adjustable-rate mortgages come with a certain amount of risks involved.
The initial interest rate are often below-market rate, which makes adjustable rate mortgages more affordable. The price of potentially saving the money, is balanced by the risk of higher interest.
Factors you must consider to calculate adjustable mortgage payments:
- Determine the average duration of loan left till pay-off date.
- Get outstanding value through amortization schedule for the length of tenure remaining till actual pay-off.
- The obtained outstanding loan balance (The principal loan amount to be repaid).
- Submitting the loan acquisition interest rate.
Assumption: Suppose Mr. A, have an adjustable-rate mortgage balance of $500,000, with a due mortgage tenure of 10 years (ten years of loan left).
Now at times:
If the market interest rate at which the loan was obtained adjusts to 5 percent.
The net monthly calculated mortgage payment will be $5,060.66.
In adjustable rate mortgages, the index rate may change, but the overall margin stays the same. If on a particular time the index rate is 5% and the margin rate is 2%, then the interest rate on the mortgage will adjust to 7%.
Understanding Interest payable: Interest that You Need to Pay?
Banks and Financial Lenders charge interest on the mortgage as a cost of lending you money.
And most banks and lenders may finance up to 80 percent of the net market price for the property.
Every month a portion of your mortgage payment goes towards paying back the interest accrued for the month and the rest for paying the principal amount.
Overall the longer you take to pay back your mortgage, the higher the buying cost for your home will be.
You can simultaneously use the amortization formula to create a loan repayment table that breaks down each payment into paying off your principal amount and interest. This shall not include any taxes payable.
You might want to consider other factors that can help you access the most profitable options.
There are several measures that you must give a second thought to save money before coming to a conclusion:
- Reducing the principal amount borrowed (This can be achieved by reconsidering or buying a less expensive property or by making down payment of more than 20% for the net mortgage value.)
- Searching for loans with a lower interest rate.
- Selecting a shorter repayment term (consider 10-15 years instead of 30)
Calculating Interest-Only Mortgage Payment
Interest-only mortgages are loans in which the borrower pays only interest on the mortgage for a certain agreed period. The net principal loan amount can be refinanced or paid in full at a specified date.
Assumption: Assume Mr. A borrows $100,000 from a financial lender at an average interest rate of 6 percent per annum, through an interest-only mortgage with monthly payments.
The calculated net monthly payment for the mortgage will be $500.
Loan Payment (Principal) = Amount x (Interest Rate / 12)
P = A x i
P = $100,000 x (.06 / 12)
P = $500
Interest-only mortgages reduce the monthly payment for a borrower by excluding the principal portion from the payment for a certain time as being agreed upon.
The borrower can choose to pay only interest for the entire term of the loan and manage accordingly for a one-time lump sum payment of the remaining principal amount.
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You can also use the Chase Home Value Estimator to calculate the exact market value of your home or a property you are interested in.
Calculate How Much will You Own in Equity
It’s crucial to understand how much of your home you actually own.
Of course, you own the home—but until it’s paid off, your lender has an interest or a lien on the property, so it’s not free-and-clear.
The amount that’s meant to be repaid is known as your home equity, usually, it is the home’s market value minus any outstanding loan balance.
Until the mortgage is fully repaid off, the loan is "secured" on the borrower's property through a process known as mortgage origination.
The property itself serves as collateral for the mortgage until it is paid off.
A mortgage usually, requires equal payments, consisting of principal and interest, throughout its term. The early payments consist of more interest than principal.
You might want to calculate your equity for several reasons:
Your loan-to-value (LTV) ratio is critical and banks & lenders look for a minimum ratio before approving loans.
If you want to refinance or figure out how big your down payment needs to be on your next home, you need to know the LTV ratio.
Your net worth is based on how much of your home you actually own. Having a one million dollar home doesn’t do you much good if you owe $999,000 on the property.
You can borrow against your home using second mortgages and home equity lines of credit (HELOCs). Banks often prefer an LTV below 80 percent to approve a loan, but some lenders go higher.
Can You Afford the Mortage Loan?
Lenders usually, offer you the largest loan amount usually, approved using their standards for an acceptable debt-to-income ratio.
However, you don’t need to take the full amount—and it’s often a good idea to borrow less than the maximum available.
The key factors to determine how much house can you afford are:
- Your net monthly income
- The advance availability of funds (savings & investments) to cover your down payment and closing costs like applicable taxes, etc
- Your gross monthly expenses (credit cards, car payments, insurance, utilities and other viable expenditures.)
- And most importantly your credit profile (credit score)
People with low or flawed credit score can qualify for mortgages, but this usually, comes with higher rates and stricter terms.
To calculate the affordability you can use the 36% golden rule. According to which the overall payments of all applicable loans (including mortgage payment) should not exceed 36% of your monthly income.
Let's simplify things up:
Suppose if you earn $11,000 a month and already pay $1000 in existing debt payments, then your monthly mortgage payment for your house should not exceed $2,960.
Suppose if you earn $11,000 a month and already pay $1000 in existing debt payments, then your monthly mortgage payment for your house should not exceed $2,960.
The income is a viable factor that helps establish a baseline for what you can afford to pay monthly.
Before you apply for loans or visit the interested property, do look at your monthly budget and decide how much you’re comfortable spending on a mortgage payment.
Once you’ve made a decision, start talking to lenders and looking at debt-to-income ratios.
If you do it the other way around, you might start shopping for more expensive homes (and you might even buy one—which affects your budget and leaves you vulnerable to surprises).
It’s better to buy less and enjoy compact space instead of struggle to keep up with payments.
Conclusion
Mortgage is a loan in which the property or real estate is used as collateral.
In mortgage, a potential borrower enters into an agreement with the lender (usually, a bank or financial institution) thereby receiving the amount agreed upon and then repays the borrowed over a set time span in full.
Thus mortgages make larger purchases possible for individuals to purchase a property or real estate.
usually, the lenders describe in detail on how much one is qualified to borrow. This is calculated based on several factors but most importantly is limited to overall income.
Costs such as homeowner's insurance, property taxes, and private mortgage insurance are typically added to your monthly mortgage payment.
How much of a loan you could borrow is very different from how much you can afford to repay without stretching your budget for other important necessities.
Therefore, before applying for a mortgage, you should be aware that the overall cost could increase significantly in the future, with respect to market trends and interest rates hikes.