Mortgage Calculator

Mortgages

A mortgage is a loan used to buy a home in which the home itself serves as collateral. If the borrower stops paying, the lender can foreclose: take the property and sell it to recover what is owed. Because the loan is secured by real estate, mortgages carry lower interest rates and longer terms than most other kinds of consumer debt.

Most mortgages are repaid in equal monthly installments over a fixed term. Each payment covers the interest that built up during the month, and whatever is left over reduces the principal, the amount still owed. Early in the loan the balance is large, so most of each payment goes to interest. As the balance shrinks, the split gradually reverses, and the final years of payments are almost all principal. This process is called amortization, and the schedule in the calculator shows it payment by payment.

In the United States the 30-year fixed-rate mortgage is by far the most common choice, because it keeps the monthly payment low and predictable. Fifteen-year loans are the next most popular: payments are higher, but the rate is usually lower and the total interest is often less than half.

Until the last payment is made, the lender holds a lien on the home, a legal claim recorded with the county that is released when the loan is paid off. The part of the home you own outright is your equity: the home's market value minus the loan balance. Equity grows in two ways, as each payment chips away at principal and as the property rises in value, and it is what you keep when you sell or can borrow against later.

Mortgage Calculator Components

Home price is what you agree to pay for the property. Down payment is the part of the price you pay upfront in cash, entered either as a percentage or as a dollar amount. The loan amount is simply the price minus the down payment.

A larger down payment does three things: it lowers the loan amount and therefore the payment, it can earn a better interest rate, and on a conventional loan it avoids private mortgage insurance once it reaches 20%. Government-backed programs allow far less: FHA loans start at 3.5% down, and VA and USDA loans can require nothing down for eligible borrowers.

Loan term is the number of years over which the loan is repaid. A shorter term means higher monthly payments but much less interest overall. Interest rate is the annual rate the lender charges. With a fixed-rate mortgage, the rate and the principal-and-interest payment stay the same for the life of the loan. With an adjustable-rate mortgage (ARM), the rate is fixed for an initial period, such as five or seven years, and then resets periodically based on a market index, so the payment can rise or fall. This calculator models a fixed rate; to approximate an ARM, run it again at the rate you expect after the reset.

The interest rate is not the same as the APR. APR folds in lender fees and points to show the yearly cost of borrowing, so it is useful for comparing offers. Use the note rate here, since that is what determines your payment.

Mortgage interest is charged monthly at one-twelfth of the annual rate. At 6.5%, that is about 0.542% a month, so on a $320,000 balance the first month's interest is $1,733.33. If the payment is $2,022.62, the remaining $289.29 goes to principal, and next month's interest is figured on the slightly smaller balance.

ARMs are usually named for their structure: a 5/1 or 7/6 ARM keeps its starting rate for five or seven years, then adjusts every year or every six months. The starting rate is typically lower than a comparable fixed rate, which is the appeal, but the borrower takes on the risk that rates rise. Caps limit how far the rate can move at the first adjustment, at each later one and over the life of the loan, so check them before choosing an ARM. To see how much you can borrow in the first place, try the house affordability calculator.

M = P × r(1 + r)ⁿ ÷ [(1 + r)ⁿ − 1]

M

monthly principal and interest payment

P

loan amount (home price minus down payment)

r

monthly interest rate (annual rate ÷ 12)

n

number of monthly payments (years × 12)

Property tax, insurance, PMI and HOA dues are added on top of M to get the full monthly housing payment, often called PITI (principal, interest, taxes and insurance).

Costs Associated with Home Ownership and Mortgages

Principal and interest are only part of the monthly cost of a home. Recurring costs include property tax, which is set by your county or city and is usually quoted as a percentage of assessed value (from under 0.5% to over 2% a year depending on where you live). Homeowners insurance protects the structure and your belongings against fire, theft and storms, and lenders require it. Many lenders collect both through an escrow account and pay the bills for you, which is why they appear in the monthly payment.

Private mortgage insurance (PMI) protects the lender, not you, when a conventional loan exceeds 80% of the home's value. It typically costs 0.3% to 1.5% of the loan amount per year. By law it must end automatically once the balance is scheduled to reach 78% of the original value, and you can ask to cancel it at 80%. FHA loans charge their own mortgage insurance premium instead. Homeowners association (HOA) dues apply in many condos, townhomes and planned communities and pay for shared maintenance, amenities and sometimes some utilities.

Other costs are easy to underestimate. A common rule of thumb is to budget 1% to 2% of the home's value each year for maintenance and repairs, plus utilities, which often run higher than in a rental. The calculator lets you enter these as other costs so the total out-of-pocket figure reflects what owning really costs, and the annual-increase options account for taxes, insurance and dues that tend to rise over time.

There are also one-time costs that are not part of the payment. Closing costs, covering lender fees, appraisal, title insurance, recording fees and prepaid taxes and insurance, usually add 2% to 5% of the loan amount. Moving, furnishing and early repairs or renovations come on top of that, so keep cash in reserve beyond the down payment.

Property tax varies more than any other cost. Nationally, homeowners pay roughly 1% of their home's value a year, but effective rates run from about 0.3% in the lowest-tax states to above 2% in the highest. Bills can also jump after a purchase, because many places reassess a home at its sale price. Look up the actual tax on the listing or the county assessor's site rather than relying on an average.

A standard homeowners policy covers the house, your belongings and personal liability if someone is hurt on your property, but it normally excludes floods and earthquakes. If you are in a flood zone, your lender will require separate flood insurance, which can cost as much as the main policy. Premiums depend on location, the age and condition of the home, the rebuild cost and the deductible you choose, and they have risen quickly in storm- and wildfire-prone areas.

HOA dues range from a few hundred dollars a year in a basic subdivision to several hundred dollars a month in a condo building with staff, a pool or an elevator. Ask how much the association holds in reserves; a thin reserve fund raises the odds of a special assessment, a one-time charge to owners for a big repair such as a new roof.

On a $320,000 loan, closing costs of 3% come to about $9,600. Part of that may be discount points, an optional upfront fee of 1% of the loan per point that buys a lower rate. Buyers can sometimes negotiate seller credits toward closing costs, especially in a slow market, and many lenders offer to cover some costs in exchange for a slightly higher rate.

Early Repayment and Extra Payments

Any amount you pay beyond the scheduled payment goes straight to principal, and every dollar of principal you remove stops collecting interest for the rest of the loan. Open More options to try three common approaches: a fixed extra amount every month, a lump sum once a year (a tax refund or bonus, for example) or a one-time payment.

Biweekly payments are another popular strategy. Paying half of the monthly payment every two weeks adds up to 26 half-payments, or 13 full payments, a year. That one extra payment a year typically shortens a 30-year loan by four to six years. Before signing up for a paid biweekly program, check whether your lender simply lets you add one-twelfth of a payment to each monthly bill, which has nearly the same effect at no cost.

Refinancing to a shorter term is the other route, and it can also lower your rate. Use the refinance calculator to compare the new payment and closing costs with the interest you would save.

Paying early is not always the best use of money. If your mortgage rate is low, the same dollars may earn more in a retirement account, especially one with an employer match. Building an emergency fund and paying off higher-rate debt such as credit cards usually come first. Some loans also charge prepayment penalties, so read your loan documents, and remember that money paid into the house is hard to get back out quickly without selling or borrowing against it.

The case for paying ahead is simple: every extra dollar earns a guaranteed return equal to your mortgage rate, the loan ends sooner, and once the house is paid off your monthly costs drop to taxes, insurance and upkeep. Many people value that security most as retirement approaches, when a fixed housing payment is harder to carry on a smaller income.

The case against comes down to what else the money could do. Paying off a 3% mortgage while a diversified investment might reasonably earn more over decades gives up that difference, and an extra payment cannot be withdrawn if you lose your job. You also lose part of any mortgage interest deduction, though that only matters if you itemize; most households now take the standard deduction and get no tax benefit from mortgage interest at all.

Prepayment penalties are less common than they once were. For most loans made today, federal rules allow a penalty only on fixed-rate qualified mortgages, only in the first three years and only up to 2% of the prepaid balance, falling to 1% in year three. FHA, VA and USDA loans cannot charge one. If you want a lower payment rather than an earlier payoff after a large lump sum, ask your lender about a recast, which re-spreads the smaller balance over the remaining term for a small fee.

A $400,000 home with 20% down means an $80,000 down payment and a $320,000 loan. At 6.5% for 30 years, principal and interest come to $2,022.62 a month. Property tax at 1.2% adds $400 a month and $1,500 a year of insurance adds $125, for a monthly payment of $2,547.62. No PMI is due because the loan is exactly 80% of the price. Over 30 years you would pay about $408,000 in interest, more than the amount you borrowed.

Adding $200 a month in extra principal from the first payment pays the loan off about six and a half years early and saves more than $100,000 in interest. Switching to biweekly payments instead saves roughly $90,000 and cuts the term by about six years.

Brief History of Mortgages in the U.S.

Before the 1930s, American home loans looked very different. They typically lasted five to ten years, required down payments of 50% or more and ended in a large balloon payment that borrowers had to refinance. When the Great Depression hit, banks stopped refinancing, and waves of foreclosures followed.

New Deal programs reshaped the market. The Home Owners' Loan Corporation refinanced distressed loans into longer, fully amortizing terms, the Federal Housing Administration (1934) insured mortgages with lower down payments, and Fannie Mae (1938) created a secondary market that let lenders sell loans and lend again. After World War II the VA loan program helped millions of veterans buy homes, and the long-term, fixed-rate, fully amortizing mortgage became the standard. Freddie Mac followed in 1970.

The effect on homeownership was dramatic. Census figures show that about 44% of American households owned their home in 1940; by 1960 the share was over 60%. It peaked at about 69% in 2004, just before the housing bubble burst.

Loose lending standards and complex mortgage securities in the early 2000s led to the 2008 housing crisis, a sharp fall in home prices and record foreclosures. The Dodd-Frank Act of 2010 created the Consumer Financial Protection Bureau and rules requiring lenders to verify a borrower's ability to repay, which still shape how mortgages are underwritten today.

In September 2008, as defaults mounted, the federal government placed Fannie Mae and Freddie Mac into conservatorship, where they remain. The FHA's share of new loans grew sharply as private lending dried up, which helped keep credit flowing while prices bottomed out. Today Fannie Mae, Freddie Mac and government programs such as the FHA and VA stand behind the large majority of new U.S. home loans.

Frequently asked questions

Sources

• Consumer Financial Protection Bureau – Owning a Home
• CFPB – When can I remove PMI?
• HUD – Federal Housing Administration history