How To Use A Mortgage Calculator Effectively
The first step in using a mortgage calculator effectively is to select the right tool based on what you want to accomplish.
Buy A Home
If you are planning to buy a home, you can use our affordability calculator that determines how much you can afford to pay for a home by looking at your income, your debts, and down payment. It will calculate a monthly payment, a loan amount and a purchase price at various debt-to-income ratios. Your debt-to-income ratio is one of the important ways that mortgage lenders assess the risk of lending to you. A critical mistake that many borrowers have made is they shop for a home that is priced so they will be at or near the maximum debt-to-income ratio and loan amount that the lender will approve for them. Using a high proportion of your income to pay your mortgage increases the risk of foreclosure or bankruptcy in the event you incur to cover unexpected expenses such as high medical bills or unexpected loss of income like job loss. A more prudent strategy would be to significantly reduce their risk by purchasing a less expensive home that results in a lower debt-to-income ratio and that fits within your risk comfort level and your means.
Refinance
If you are considering refinancing your mortgage to reduce your monthly payment or the total amount of interest you will pay on your mortgage, you can use a refinance calculator that evaluates your current loan and the new loan you may refinance into. It may consider your income tax rate and how much on average that you earn on investments. It will then calculate when you are projected to break-even on the refinance. The goal is to refinance into a mortgage with a break-even date that is well in advance of the date you plan to sell your home.
If you are considering refinancing your mortgage to reduce your risk, for example to convert from an adjustable rate mortgage to a fixed rate mortgage, you can assess your current risk by evaluating the impact of different future interest rate scenarios on your minimum monthly payment and total interest paid for your current mortgage.
Pay Off Mortgage Early
If you are considering making additional principal payments on your mortgage, you can use an extra payment calculator to estimate your savings and how quickly you can pay off your mortgage.
Why You Should Use a Mortgage Calculator
If you want to purchase a home, are wondering whether or not you should refinance your mortgage, or want to know how much money you would save by paying off your mortgage early, you should consider using a mortgage calculator because:
- Mortgage calculators can help you make smarter mortgage decisions with confidence. Making the right mortgage decision for your situation can have an enormous impact on your life since:
- owning a home is the largest investment many people make in their entire life;
- getting stuck in the wrong mortgage can be a traumatic, life changing experience; and
- educating yourself about your mortgage options can give you peace of mind by freeing yourself from being totally reliant on the good intentions of your loan officer who may actually be receiving a commission based on your interest rate and the fees charged.
- Thoroughly understanding the costs, benefits and risks of your mortgage options is hard to do without a mortgage calculator.
- Online mortgage calculators are free and easy-to-use.
What A Mortgage Calculator Can Do
Make smarter mortgage decisions with a mortgage calculator that can help you:
- determine how much you can really afford to pay to purchase a new home.
- decide whether you can afford a mortgage by:
- calculating your estimated monthly mortgage payment, including: principal, interest, mortgage insurance, taxes and hazard insurance; and
- calculating the total interest you are projected to pay over the life of the loan.
- understand how your monthly principal and interest payment could change over time with some types of mortgages, including:
- adjustable rate mortgages (ARMs);
- interest-only mortgages; and
- balloon mortgages.
- evaluate the relative risk presented by an adjustable rate mortgage by evaluating different scenarios for future interest rates: including stable interest rates and the best and worst case interest rate scenarios.
- compare different mortgages options and choose the best mortgage for you.
- determine how long you would need to keep your home loan to break-even on a refinance.
- decide whether you will save more by refinancing your mortgage at a lower interest rate or make extra payments to pay off your current mortgage early.
- evaluate the potential impact of refinancing from one loan type to another, for example refinancing from an adjustable rate mortgage to a fixed rate loan.