What Is a Mortgage Calculator?

A mortgage calculator is a specialized online tool designed to help aspiring homeowners plan their financing. Our mortgage calculator prompts you to input the home price, down payment, interest rate, and loan term. You also need to provide other homeownership costs, including homeowner’s insurance, property taxes, and mortgage insurance. The calculator uses a built-in algorithm to estimate your monthly payment. You can experiment with different parameters to check the effect on your monthly payments.

Key Components of a Mortgage Calculator

The mortgage calculator incorporates all the elements constituting a mortgage. These are: 

Home Price: The total amount payable for the home you intend to purchase. This value is inclusive of the purchase price, closing costs, and other upfront fees.

Down payment: The initial amount paid towards the purchase of the home, usually a percentage of the total home price. The higher your down payment, the lower the mortgage principal, hence the lower your monthly payments.

Interest Rate: The lender will charge you interest on the principal amount of your loan, expressed as a percentage of the outstanding loan balance. Mortgage rates are variable, typically changing every day. But you can lock in a fixed rate for the lifetime of your loan or at least for most of it.

Loan Term: Mortgage loans have fixed repayment periods, often ranging between 10 and 30 years. A longer term means lower monthly payments but more interest.

Property Tax, PMI, and Home Insurance: In addition to principal and interest, homeownership comes with other costs, the most common being property taxes, private mortgage insurance (PMI), and homeowners insurance. The amounts vary depending on the home price, location, and other factors.

Types of Mortgage Calculators

There are three main types of mortgage calculators:

Purchase Calculators: This is the simplest and most common mortgage calculator designed to help homebuyers plan their financing.

Refinance Calculators: If you are an existing borrower, a refinance calculator will help determine if refinancing would save you money. It’s almost similar to a purchase calculator, only that it includes a cash-out option for cash-out refinances.

Amortization Calculator: This calculator shows how your monthly payments are allocated towards principal and interest over time. It can help you determine how much you will save by making early payments and how much equity you will have in the home at any point during your loan term.

Mortgage Payment Formula

Are you curious about the formula used as the basis of the mortgage calculator, or are you a math geek interested in understanding how the numbers are crunched? Here’s the mortgage payment formula:

Symbols Explained

M = Monthly mortgage payment amount

P = Principal loan amount

r = Monthly interest rate (Annual rate / 12)

n = Number of payments (Number of years × 12)

How to Use the Mortgage Calculator

The formula behind mortgage calculations is complex, as demonstrated above. But LittleBigHomes saves you the hustle by providing an intuitive yet precise mortgage calculator. To use it, follow these steps:

  • Start by entering the price of the home next to the space labeled “Home price” if it’s a purchase or the current home value if it’s a refinance.
  • The “Down payment” section is for the amount you plan to put down on the home. If it’s a refinance, enter the amount of equity you currently have. You can enter the down payment as a dollar amount or as a percentage of the purchase price.
  • In the “Loan term” section, select the term of your loan. You can choose between 30, 20, 15, or 10 years.
  • Input the interest rate offered by your lender in the “Interest rate” section.
  • Lastly, input property tax, PMI, and home insurance in their respective boxes.

Note that our calculator defaults to values reflecting an average home price of $425,000, but these values are adjustable.

Costs Included in Mortgage Payments

The value returned by the mortgage calculator is a collective sum of the following costs:

Principal: This is the amount borrowed. Part of the monthly mortgage payments go towards repaying the principal.

Interest: This is the cost of borrowing or the lender’s profit. Each monthly payment includes interest, usually charged annually but divided into 12 months.

Property taxes: Property taxes are the fees your local government charges for owning a home in their jurisdiction.

Homeowners insurance: Although not required by law, homeowners insurance is usually a prerequisite for mortgage lenders to protect the collateral (the home being purchased).

Mortgage insurance: Conventional loans with down payments lower than 20% require private mortgage insurance, payable monthly. Mortgage insurance requirements are different for government-backed loans.

PMI: Conventional loans with down payments lower than 20% require private mortgage insurance (PMI) that is payable monthly. Mortgage insurance requirements are different for government-backed loans.

HOA fees: If you buy a home in a community with a homeowner association, HOA fees will be part of your monthly mortgage payments.

How the Mortgage Calculator Can Help

Financial planning is arguably the most essential part of home buying. That makes a mortgage calculator a non-negotiable tool for homebuyers. It enhances financial planning in the following ways:

Determine affordability: Foreclosure is common in the US and a nightmare for any homeowner. The leading cause of this crisis is overstretching your finances. Use the mortgage calculator to ensure you can comfortably afford your monthly payments while meeting other financial obligations.

Compare different loan options: There are many mortgage lenders, each with different rates and loan terms. With a mortgage calculator, you can compare different loan options with ease.

Determine the ideal loan term: You can also use the mortgage calculator to compute the monthly payments for different loan terms. You may realize you can service a shorter loan term comfortably, which would save you a lot in interest.

Determine the ideal down payment amount: The down payment you make on a home affects the principal loan amount and, therefore, your monthly payments. Use the mortgage calculator to experiment with different down payment amounts allowable by your lender to determine the most ideal for you.

Ascertain when to get rid of mortgage insurance: With an amortization mortgage calculator, you can determine when you will have reached the 20% equity threshold and get rid of PMI, which lowers your monthly payments.

Plan to pay off your mortgage early: If you have extra cash, you can consider making early payments to save on interest and build equity faster. Use the amortization calculator to determine how much you will save by making additional payments at different points during your loan term.

Establish if ARM is a good option: You can use the mortgage calculator to determine if an ARM would save you money compared to a fixed-rate mortgage.

How To Lower Your Monthly Mortgage Payment

If the mortgage payment returned by the calculator seems out of reach, you can tweak these variables to make it attainable:

Choose a longer term: By opting for a longer term, you spread the principal amount over a longer period. As a result, monthly payments become lower but with more interest.

Buy an affordable home: The cheaper the house, the smaller the principal amount, assuming a constant down payment and, hence, a lower monthly payment.

Make a bigger down payment: By making a bigger down payment, you avoid PMI while also reducing the principal loan amount.

Shop for lower interest rates: At any one point, different lenders will offer varying interest rates. The rates also change on a daily basis. Look for lenders with favorable interest rates. You can also wait for lower rates if there is no urgency and if market trends favor a drop. But keep in mind home prices could also rise in parallel.

Refinance: This option is for existing homeowners. If you have good credit and the rates are considerably lower than when you took out the initial mortgage, consider refinancing.

Early Mortgage Repayment

There are many reasons why you may feel the need to pay off your mortgage earlier, either wholly or partially. These include:

  • Coming into a substantial sum
  • Getting a salary increment
  • A desire to sell the home
  • To refinance
  • To save on interest
  • To expedite the building of equity

Early Mortgage Repayment Strategies

A mortgage calculator enables you to experiment with different repayment strategies, including:

Additional amount to monthly payment: A salary increment may allow you to increase your monthly payments. The mortgage calculator helps you establish the impact of such increments from a specific date.

Yearly payment: Some investments, such as stock options, provide annual returns that you can channel into your mortgage payment plan.

One-time additional payment: The mortgage calculator also helps you ascertain the effect of rolling in a lump sum on a particular future date. Such payments can result from an inheritance, a bonus from work, or proceeds from selling other possessions.

Refinance: This is a rather offbeat way to repay your mortgage early, but still worth considering. You can refinance and switch to a shorter loan term, which enables you to pay off the balance faster. Locking in lower interest rates also means more of the monthly payment repays the principal rather than the interest.

Drawbacks of Early Repayment:

Expediting mortgage repayment also comes with trade-offs and downsides. These include: 

Prepayment penalties: Some mortgages are subject to penalties should you decide to make large monthly payments or pay off the loan before the set period. However, there is an exception for a one-time payoff from selling the home. Prepayment penalties are expressed as a percentage of the outstanding balance at the time of prepayment or the total interest for a specified number of months. The penalty amount decreases with time until it phases out entirely.

Opportunity costs: When you use a lump sum to pay off your mortgage, you forgo investment opportunity, which could have potentially yielded returns. Note that mortgage rates are usually lower than most financial markets’ returns.

Loss of disposable income: If you opt for early repayment purely to save on interest or accelerate homeownership without extra cash, you are forced to tap into your disposable income, making it hard to meet emergencies.

Loss of Tax Deduction: Mortgage borrowers can deduct interest costs from their taxes if they itemize their deductions. But with lower interest payments resulting from early mortgage repayment, the tax-deductible amount is lower.