How To Get Mortgage Loan, Calculate Before Apply And Know Your Estimate Your Monthly Payment,
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Before you buy a house, you should use a mortgage calculator to determine how much your home will cost per month and how much you’ll pay in total interest.
This is an important step in double-checking whether you can truly afford your would-be home. Our mortgage calculator will help you to determine what your monthly payments would look like.
Using the loan calculator is simple. Just enter your home’s value, the down payment you’re making on the property, and the interest rate. The calculator will show you the amount that you’d have to pay for your home so you can determine if this can fit into your budget. Give it a try above.
M = P[r(1+r)^n/((1+r)^n)-1)]
If that looks like Greek to you, don’t worry—the point of the calculator above is so that you won’t have to do this calculation yourself—but it is helpful to know what the number you receive from our calculator truly represents. Here are what the components of the formula mean:
M = The total monthly mortgage payment
P = The principal balance of your mortgage loan, which is the entire loan amount that you are borrowing
r = The monthly interest rate that you pay on your mortgage loan. When you get your rate from your lender, it will be expressed as an annual rate. To find out what the monthly rate is, you’d divide your annual interest rate by the 12 months of the year. If your annual rate was 4.5%, you would divide .0045/12 to get your monthly rate of .00375.
n = The total number of payments that you will make over the life of your mortgage loan. You can determine the total number of payments by multiplying the number of years of your mortgage loan by 12 months in a year. So, if you have a 15-year mortgage at a fixed rate, you would multiply 15 x 12 to get 180 total payments
When you plug your numbers into this formula, the biggest factors that affect the cost of your mortgage payment are the total cost of the home that you’re buying, the amount of your down payment, and the length of the term of your mortgage loan.
A longer-term loan will significantly reduce your monthly payments since you’ll have years longer to pay your loan balance down to $0—but your total loan costs will be higher due to all the extra interest that you pay over time.
Because you do pay interest for a very long time with any mortgage, even a slight increase in the interest rate can end up costing you thousands of dollars over the life of the loan.
Because the rate you pay can affect your costs so much, you should carefully compare rates from several different lenders before you get a mortgage. Comparing rates from the best lenders to find the most affordable interest rate could make both your monthly payments and total loan costs much more affordable.
How Much House Can I Afford Based on Income?
Calculating your monthly mortgage payment is important because you want to make sure your home is affordable.
However, your mortgage is just one factor that affects the total housing costs you incur each month. In addition to the mortgage payment you have to make, there are likely other costs associated with being a homeowner that you have to plan for, too.
First and foremost, you need to plan for the costs you’ll incur when you close on your mortgage. These costs include:
Title insurance: When you buy a home, you have to pay for the costs of a title search to ensure there are no liens or encumbrances on the property. You also want—and your bank will require—your insurance company to protect you in case problems with the title develop later.
Property taxes: You may have to pay a prorated portion of the property taxes to the sellers when you buy the home.
Transfer taxes: In most states, there are taxes associated with transferring the property and recording the deed.
Mortgage origination costs: You’ll have to pay a fee for a credit check and sometimes will also incur other loan application or origination fees depending on your mortgage lender.
Appraisal, survey, and inspection costs: Appraisals are required by lenders to determine the value of the home. Inspections are required to make sure the property is structurally sound. Surveys are necessary to determine land boundaries.
There are also other ongoing costs that you incur each month as a homeowner that you need to plan for in addition to the principal and interest on your mortgage payment.
In fact, your total housing costs are typically referred to as PITI, which stands for Principal, Interest, Taxes, and Insurance. Some of these costs that you can expect to pay include:
Private mortgage insurance (PMI), which you have to pay if you do not put at least 20% down on your home loan. PMI protects the lender in the event you default by ensuring all of the lender’s costs are covered if they have to foreclose on the house.
Homeowner’s association fees or maintenance fees. If you live in a building or community that charges common fees to pay for shared spaces, you typically have to pay these fees in the form of monthly payments.
Property taxes: Most municipalities throughout the country require you to pay property taxes. There may also be a separate school tax.
Homeowners insurance: You need homeowners insurance to protect your property. The lending bank will typically require this, but buying a policy is a good idea even if you don’t have a mortgage.
Banks consider PITI when determining how much they are willing to lend you. In fact, to assess affordability, banks look at your debt-to-income ratio, which is the total amount of your monthly obligations (including PITI plus other debts) divided by your income.
As the Consumer Financial Protection Bureau explains, your DTI can’t exceed 43% to qualify for a conventional mortgage.
Say, for example, that your monthly mortgage payment is $1,000. You may also owe $500 per month in property taxes; $150 per month for insurance; $50 per month for HOA fees; and $20 per month for PMI. In this case, your total housing costs per month would be $1,720.
If you had a $300 car payment and a $200 student loan payment on top of that, your total monthly obligations would be $2,220. If your income was $6,000 per month, your DTI would be $2,200/$6,000 or about 37%—so your home would be considered affordable since you’re below the maximum 43% DTI.
The Census Bureau also warns that if your housing costs alone exceed 30% of your income, your housing is too expensive for you to comfortably afford.
Do I Have to Make a 20% Down Payment?
Traditionally, mortgage lenders required that home buyers make a 20% down payment. This would mean if you were buying a $300,000 home, you would have to put down 20% or $60,000 up front and borrow the rest. However, many lenders now accept much lower down payments.
In fact, it is possible to put down as little as 3% with some conventional lenders or a 3.5% down payment if you obtain a loan insured by the Federal Housing Administration. And if you obtain a loan backed by the Veterans Administration (a VA Loan), you can buy a house with no down payment at all.
However, while you might not need a down payment, that does not mean it is a good idea not to make one. There are substantial downsides to not making a down payment, including:
Higher monthly mortgage payments: The less money you put down on your home, the more you have to borrow and the higher your mortgage payments will be. Many of the loans that come with no down payment also charge a higher interest rate or impose more fees.
Risk of ending up underwater on your home loan: When you owe more than your house is worth, you’re underwater. This is a major problem. If you are underwater, you can’t refinance your loan to a lower rate. Selling your house is also very difficult. Unless you can come up with the cash to pay off your loan in full and all closing costs, you would not be able to sell your home. You would have to get your lender to agree to a short sale, which means accepting less than the full balance due. Short sales ruin your credit and, in some states, the lender could come after you for the difference between what you paid and what you owed.
More risk of losing your home: If your home payments are bigger, the chances you won’t be able to make those payments are increased—so you’re at greater risk of foreclosure. This is especially true if you wouldn’t be able to sell your home for what it’s worth, so you’d have few options other than to render your home to the bank.
Is PMI Necessary?
If you obtain a conventional mortgage with a down payment of less than 20%, you also face another big downside: you may have to pay for private mortgage insurance (PMI). As mentioned above, PMI protects the lender in the event of a default—but the borrower has to pay the premiums, which could be around 1% to 2% of the mortgage value each year.
While VA loans and FHA loans don’t require PMI, there are other mortgage insurance costs and upfront fees associated with these products that you have to pay, so there’s still an added cost to making a low down payment.
PMI adds a significant cost to your loan with very little benefit to you, other than the fact you can get into a house earlier since you don’t have to save up for a big down payment. You need to carefully consider whether it’s worth getting hit with these extra costs or whether you should wait and save more before buying a home.
What’s the Necessary Credit Score to Get a Mortgage?
In addition to making sure you can afford your mortgage payments, lenders also look at your credit score when deciding both whether to lend to you and the amount of interest to charge you for borrowing.
When lenders look at your credit score, most have a minimum score requirement before you can even get approved for a mortgage loan. This minimum credit score is lower with government-backed loans, including FHA loans, VA loans, and USDA loans than it is for conventional mortgage loans.
For a loan backed by the FHA, you usually need a credit score of 580, although it’s possible to get a loan with a score as low as 500 under certain circumstances if you make a larger down payment. VA lenders typically require a score between 580 to 620, depending on the lender, while USDA loans typically won’t be available to you if your score is less than 640.
Conventional loans, on the other hand, generally require a minimum credit score of 620—but you will pay much higher rates and could be stuck with a subprime mortgage if your score is low. To get the most competitive rates on a mortgage, a score of 740 or higher is preferred.
Should I Choose a 15- or 30-Year Mortgage?
The length of your mortgage loan affects the monthly payment and total loan cost, as mentioned. You can borrow for all different lengths of time, but two of the most common types of mortgages are 15-year mortgages and 30-year mortgages. Choosing between the two can be a challenge, so understanding the differences is important.
With a 30-year mortgage, you’re stretching out your loan over a longer time. Your interest rate is usually higher since longer loans are riskier for lenders, but your monthly payment is lower than with a 15-year mortgage due to the fact you have an extra 15 years to pay off your loan.
A 15-year mortgage, on the other hand, will likely have a lower interest rate but will have much higher payments because you’re paying off the loan in half of the amount of time.
There are benefits to a 15-year mortgage—you’ll save money in the long run and will own your home sooner. However, you’re also committing to high monthly payments, and paying off a mortgage as quickly as possible doesn’t always make sense because mortgage interest rates are relatively low for most borrowers and interest is tax deductible for those who itemize their tax deductions.
If you could make more money investing than paying off your mortgage early, that may be a smarter financial move. Plus, if you opt for a 30-year mortgage, you always have the option to pay off the loan early—as long as your lender won’t impose any prepayment penalties.
What About Adjustable Rate Mortgages?
You also have the option of choosing an adjustable rate mortgage, such as a 5/1 ARM or a 7/1 ARM. These mortgages are typically amortized to be paid off over 30 years, but your mortgage rate is only locked in for a limited period of time.
With a 5/1 ARM, your interest rate is locked in for five years and with a 7/1 ARM, it’s locked in for seven years. After that period is over, your interest rate could adjust periodically. With a 5/1 or 7/1 ARM, the “1” indicates the loan interest rate could adjust annually.
Adjustable rate mortgages are tied to financial indexes. The starting interest rate is typically below the starting rate on a fixed rate mortgage, so the loan can seem more affordable at first. But unfortunately, rates can rise over time, so there’s added risk to an adjustable rate mortgage.
If you plan to sell soon or refinance the home before the rate adjusts, these can be a good option—but be aware that if property values fall or your credit score changes, you may not be able to follow through with your plans and paying your loan may become unaffordable.
How Do I Get Prequalified for a Mortgage Loan?
If you’re planning on applying for a mortgage, it’s a good idea to try to find out in advance what kind of mortgage loan you can qualify for. There are two ways to do that.
You could get pre-qualified, which would mean providing some basic financial information about your income and debt to find out what kind of loan you could get. Pre-qualification means you’re likely to get approved for a loan as long as the information you provided was accurate, but it’s not a definite approval.
You could get pre-approved, which involves providing much more financial information including bank statements and tax returns. When you get pre-approved, you’re told specifically how much you can borrow and what the terms of your loan would be. You will generally be approved with those terms as long as nothing changes and, in some cases, you can even lock in your rate for a period of time so you’re guaranteed to get the specific loan terms you were pre-approved for.
Many sellers want to see a pre-approval letter before they will accept an offer because they don’t want the sale to fall apart due to you not being able to get a loan.
How Can I Pay Off My Mortgage Early?
Sending in extra payments is the best way to pay off your mortgage early, and an easy way to do that is to tweak how you pay your mortgage.
If you get paid bi-weekly—for a total of 26 payments per year instead of 24—you can pay ½ of your mortgage payment with each paycheck instead of just sending in one mortgage payment per month.
If you take this approach, you’ll end up making an extra full payment each year since you’ll receive three paychecks in two months out of the year. This can shave years off of the life of your mortgage.
Paying biweekly makes it easy to adjust to sending in a little extra cash since the same payment amount is taken out of every single paycheck. Not all lenders accept biweekly payments, though.
There are services that will process these biweekly payments for you for a small fee, or you can just transfer the money every payday to a savings account and then make your mortgage payments out of that account once per month.
You could also just commit to paying a small amount above your required mortgage payment each month, or you could make extra payments when you get bonuses, tax refunds, or another influx of cash.
Bottom Line: Calculate Your Mortgage to Determine What You Can Afford
Use our mortgage calculator to find out how much house you can afford, and be sure to shop around to find the best mortgage lender with the lowest rates so you don’t overpay for your new home.