Buying a home is not a simple or straight forward process. There are many twists and turns along the way. Understanding the ins-and-outs of the mortgage process and determining affordability in making a home purchase is complicated. Using the assistance of a mortgage calculator can help to simplify this process.
Reasons to use a mortgage calculator
Using a mortgage calculator is a good way for home buyers to determine how much they can afford to borrow. This will help avoid borrowing too much money and running the risk of falling behind on mortgage payments. Once a home owner falls behind on mortgage payments, he runs the risk of falling into foreclosure proceedings if he cannot make up the delinquent payments. Another way of using a mortgage calculator is a form of “best guessing” how much money the buyer can afford to borrow. The user would enter the amount he wishes to borrow along with the desired finance rate and loan term to see whether the results will be within his affordability range.
How do mortgage calculators work?
A mortgage calculator will break down the monthly mortgage payment for several types of mortgage loans. Many calculators have pre-set values, such as assuming the buyer is making twenty percent down payment. Users should know any pre-determined values before inputting their loan information into a mortgage calculator.
Potential home buyers need to have three essential elements of information for input to use a mortgage calculator. Users must input the price of the home, the interest rate, and the term of the loan. With this information, the calculator provides the monthly repayment amount and also an “interest only” repayment amount. There are several different types of mortgage calculators that will provide additional useful information to potential borrowers.
Types of mortgage calculators
Various types of mortgage calculators exist to help home buyers make an informed decision. Here are some of the most common types of mortgage calculators available.
- Affordability Calculator: The affordability calculator is helpful in assessing the buyer’s entire financial situation and analyzing it to determine home affordability. With this calculator, there are four steps involved. In the first step, the user inputs the loan information including down payment, the amount of the loan, the interest rate, and the term of the loan; in step two, all forms of income are entered into the calculator; for step three, other types of loans and debt are entered; for the final step, tax and insurance information is input into the calculator. The resulting financial analysis provides a breakdown of the monthly principal and interest, monthly taxes and insurance, total monthly mortgage payment, monthly income, amount of other monthly debt, the cost of the home, down payment amount, and home value.
- Basic Mortgage Calculator: For those who are not looking for a full financial analysis but only want basic information about how much monthly mortgage payments will be, the basic mortgage calculator provides this information with easy-to-understand results. With this calculator, the user simply has to input the amount of the loan, the mortgage term, and the interest rate. An estimated monthly payment is then provided.
- Interest Only Calculator: An interest-only calculator helps compare interest-only loans with other fully amortized mortgage loans. Again, the user just needs to input the loan amount, interest rate, and loan term. Two results are given. The normal monthly mortgage note and an interest-only payment. Knowing the amount of interest on a monthly mortgage note can be helpful in determining if an interest-only loan is right for the borrower.
- Loan Comparison Calculator: A loan comparison calculator lets the user compare up to three different loans with different rates and terms side-by-side. The user enters the loan amount of each loan, along with the interest rate and loan term. Other known fees associated with the loans can also be entered. A detailed analysis is calculated to give potential home buyers an insight into which loan is the best deal.
- Adjustable-rate Mortgage Calculator: An adjustable-rate mortgage calculator is useful for home buyers considering taking out an adjustable-rate mortgage. The calculator will determine possible payments amounts after the initial lower payment period of the loan has ended. With this calculator, the user must know the loan amount, the term of the loan, starting interest rate, months before the first adjusted payment, how many months between adjustments, the expected adjustments, and the interest rate cap.
Free versus fee mortgage calculators
There are several mortgage calculators that are free to consumers. However, some mortgage calculator sites will charge a fee to users. Others require the user to register and provide personal information. Home buyers must be careful in sharing personal information online. Personal information entered online may be given to loan companies who will follow-up with a solicitation call.
Limitations of mortgage calculators
While a mortgage calculator is a great tool to assist home buyers in determining how much money they can afford to borrow, they are only as accurate as the information input into them. The best a mortgage calculator can do even with accurate input is provide a rough estimate of how much the mortgage payments will be. Taxes and insurance requirements are often not calculated into the figures produced by mortgage calculators.
Using a mortgage calculator is not a substitute for good judgment. However, it can provide potential homebuyers with an important tool for determining home mortgage affordability.
