If you are trying to buy a new home, there’s a high probability that you need to take out a loan. If that’s the case, you need to do some serious math to know what you are getting into. Fortunately, you can use a home loan calculator to know how much a mortgage will cost you.
In this post, we will go over the basics of using a home loan calculator. We also have a section on the types of calculator you can try.
Don’t worry about the unfamiliar terms, we will go over those big words too although we still encourage you to brush up your real estate vocabulary -your knowledge could always come in handy. If you are looking for resources to check out, this list of real estate websites could be useful to you.
If you have no idea how to get started on the home buying process, you to check out this 8-Step Guide on Buying a House first.
Getting to Know Your Home Loan Calculator
We know the process of buying a home can be tedious, draining, and stressful. Aside from taking a breather when you feel overwhelmed, you should also consider using a home loan calculator. Decoding the math behind a mortgage can give you a better idea about the financial commitment the loan requires.
To get you started, here are the most common terms you will see in a house loan calculator.
Home price or home value refers to the total cost of the home you want to buy. You can also input your budget if you don’t have your eyes on a particular property yet.
When you borrow money to buy a home, you are most likely going to pay for the down payment. If you did a quick internet search, you have probably learned that traditional lenders require a 20% down payment based on the purchase price of your home. So, if your home costs $200k, you should pay $40,000 ($200k *20%) to the seller. The lender will cover the remaining amount of $160k.
But if you are thinking that most people actually put down 20% as down payment, you are wrong! Based on March 2019 statistics from the National Association of Realtors, 74% of non-cash buyers (those who took out a mortgage to buy their home) who purchased their first home put down less than 20% as a down payment. This could be due to having access to loan programs which allow reduced down payment requirements.
In an FHA loan, for instance, you can pay as little as 3.5% as a down payment. Some calculators, like the Zillow loan calculator, allows you to enter just the percentage or just the dollar value.
Depending on the home loan calculator you are using, you may be able to tweak down payment value by entering the percentage. You may also input the dollar value if it’s more convenient.
There are also loan programs with zero down payment such as the VA loan. Some websites offer a special VA loan calculator since there are certain benefits for people taking advantage of this program.
Pro Tip: Check if you qualify for down payment assistance programs and grants for first time home buyers.
Home Loan Amount
The home loan amount which is also referred to as your mortgage amount or mortgage value is your House Price less Down Payment. This is the actual amount you need to borrow from a bank or another financing company. Your lender can also add Mortgage Insurance to your home loan. In this case, the Loan Amount would be House Price plus Insurance less Down Payment.
Some websites also refer to the home loan amount as the principal. In the SBI Home Loan Calculator and the Axis Bank Home Loan Calculator, for instance, you can input the Loan Amount directly. You don’t need the House Price or the Down Payment value.
Loan Program or Term
This refers to how long you plan to pay for your mortgage. In some calculators, this is expressed in years, but in some, you can choose the number of months.
Most people will choose a term which is between 15 to 30 years. Some companies also refer to this as the loan tenure or the amortization period.
Amortization is the fancy term used to refer to allocating the cost of your home over a period of time. Here, you are allocating the cost of your home over the number of years you have to pay for it.
If you find a real estate loan calculator online, you could input the interest rate for the loan. If you have no idea how much the interest charged to you would be, you can always use the average figures. The home loan calculator from Zillow, for instance, displays the average mortgage interest based on certain factors.
Private Mortgage Insurance
Usually abbreviated as PMI, Private Mortgage Insurance is applicable only to loans where the borrower pays a down payment of less than 20 percent. This insurance protects the lender for losses in case you default on your loan.
The PMI usually costs 0.5 to 1% of your loan amount. So, for a $100k loan, you could pay $1k as PMI. There are ways to skip PMI. You should consider options like a piggyback mortgage if you are not a big fan of PMI
What Does the Amortization Schedule Mean?
The amortization schedule is a table displaying the following:
- Period or Term. This is displayed either in months or as numbers (1,2,3).
- Monthly amortization or monthly loan payment. While you can determine your monthly payment without a house loan calculator, it’s easier to just use one. If you are brave enough to deal with the math behind it, The Balance lays out the whole process. We suggest doing this on Excel if you’re up for the challenge. But for those who are not a big fan of math, let the amortization loan calculator do its magic. Take note that the monthly amortization will remain the same for the entire life of your loan.
- Interest paid during the month. This would be the loan amount multiplied by the interest rate and divided by 12. If you are computing the annual interest paid, you can simply multiply the loan amount by the interest. If you borrowed $300k at an interest rate of 4%, the annual interest will be monthly interest payment will be $1k ($300k *4% divided by 12).
- Principal paid for during the month. This amount is actually what’s left when you deduct interest from the monthly amortization.
- Remaining loan balance. This refers to the total loan amount less the principal payment for that month. If you look at the amortization report, you will see that most of your payments go to interest payments rather than the principal.
Homeowner Expenses and What They Mean
If you looked up a quick home loan calculator, you probably have a better idea of what the fields mean. But sometimes, you find a calculator which details homeowner expenses.
It would be better to include property taxes, Homeowner’s Association (HOA) Fees and Home Insurance when you are trying to figure out the cost of buying a new home.
- Property Taxes – this amount will differ depending on your state. The tax is based on your home’s value.
- Home Insurance – Most lenders include home or hazard insurance in their requirements. This insurance will provide protection from damage on your property due to lightning, fire, vandalism, burglary, explosions, and storms among others. This insurance also includes personal liability coverage which will protect you from lawsuits if an injury happens on your property.
- HOA Fees – Are you planning to buy a townhouse or a condo? If yes, you may be required to pay HOA fees. This monthly payment will go to the maintenance of the common areas and amenities in the property such as pool maintenance, garbage collection, landscaping, and hazard insurance.
Home Loan Calculator Types
It’s not enough to know the basic terms in home loan calculators. It also pays to be familiar with the types of calculator you can find online.
Home Loan Calculator Based on Loan Type
When you take out a loan, you have two options: a fixed loan or a variable interest loan. In a fixed loan, the interest rate applicable to your loan will remain the same throughout the term. For a variable interest loan, the interest will depend on the prevailing rates as determined by your lender.
EMI Home Loan Calculator
If you looked up house loan calculator, you would most likely send up with an EMI home loan calculator. EMI actually stands for Equal Monthly Installments. EMI is usually applicable to fixed-rate loans where you pay a fixed amount each month.
If you are using something like the home loan calculator from SBI or Zillow, all you need to do is choose the term which is in the form of years. If you are seeing something like 5/1 ARM that is for a hybrid variable rate loan.
Variable Rate Calculator
This loan usually comes in the form of an adjustable rate mortgage or an ARM. In an ARM, the loan will be fixed for a certain period. The ARM is actually a hybrid mortgage since it has a fixed and a variable component. But it is one of the most common types of mortgage today.
In some calculators, you can see the option for 5/1 ARM or something similar to it. This means that the loan will have a fixed interest for the first five years. After five years, the rate will be adjusted annually based on a benchmark or index rate. These ARMs usually have a rate cap that will limit how high the interest charges can be.
Some calculators can help you compute amortization based on an ARM mortgage. Bankrate has this FHA home loan calculator, VA home loan calculator, and first time home buyer house loan calculator that would help you figure out how much an ARM mortgage could cost.
Refinance Loan Calculator
Refinancing refers to applying for a new loan and paying off the old one. Most people opt for refinancing when they are offered better terms.
Refinancing is also an option when you are consolidating debt. If you decide on refinancing when you are having money problems, the process is often referred to as debt consolidation.
If you are looking for a home loan calculator for this purpose you may encounter additional terms. Most refinancing calculators will allow you to key in the original loan, the remaining term, interest rate, and original term. You also have to input the details of the new loan including the term, rate, and the mortgage points.
Mortgage points or discount points is the amount you pay the lender to get a better interest rate. Each mortgage point is equal to 1 percent of your loan. If your loan value is $100k, 1 point would be equal to $1k.
Prepayment of Home Loan Calculator
What if you decided to take out a loan and chose a longer term but you are planning to make advanced payments? Well, you can actually plan the purchase of your new home while taking that advanced payment into consideration.
The Prepayment of Home Loan Calculator comes with a feature that allows you to input a prepayment amount. In some cases, you can only add one prepayment but others will have a frequency or how often you make the extra payments. There could also be features allowing you to see how much you saved by prepaying the loan.
Home Equity Calculator
While looking for calculators online, you might have come across the home equity loan calculator. Your home equity refers to how much of the home belongs to you. The part that belongs to you or the amount you have paid for through the down payment and the principal portion of your monthly installments is your home equity.
What is a home equity loan calculator?
The home equity loan calculator shows how much you can borrow against your equity. Many lenders are willing to extend a line of credit or loan based on your home equity. You will likely to receive this offer if you own more than 20% home equity. Of course, lenders will also consider your creditworthiness among other factors. This loan can be useful for emergencies or debt consolidation although it may not be the most useful to you right now.
More Calculators to Try
Aside from those calculators, there are also others which may be helpful in your quest to look for funding for your new home.
Loan Eligibility Calculator
If you are still in the process of gathering information, you might want to look for a home loan eligibility calculator. This is a qualitative calculator – so, there are no numbers. Here you can input items related to your credit rating, age, employment stability, and financial situation to see if you are eligible for a loan.
Usually, you can find the loan eligibility calculator in websites for lenders or banks with offering mortgage and other loan products.
Home Sale Proceeds Calculator
If you are planning to sell an old property and buy a new one, you should not just focus on a home loan calculator. A Homesale Proceeds Calculator will also be necessary! You can find out how much profit you can make when you sell your home using this calculator.
Pro Tip: Check out the link above to download a free home sale proceeds calculator. Don’t worry, the calculator comes with detailed steps on how to evaluate the sale of your home.
I’m Done Calculating, Now What?
Congratulations on taking full control of your finances! Looking at the figures would give you a better idea of how much you will be spending. But we suggest that you take this time to do the following.
Use the Calculator to Assess Alternative Options
Even if you have a budget, you might end up spending more than that amount. So, it is always useful to give yourself a bit of leeway. Try to mirror different scenarios with a home loan calculator, here are some of the changes you can try:
- change the home value or the loan value
- adjust the interest rates
- increase/decrease your down payment
- compute loan payments with and without PMI
- lengthen/shorten the term
Observe Where Your Payments Go
Don’t just look at the amortization values, study where the money you would pay will go. This may also help you assess where to get a loan, what interest rates to go for, etc. You can learn so much by scanning through the amortization report.
Compare Loan Types
What kind of home can you afford? This article may help you answer that question, but we also suggest doing a comparison of different loan terms on your own.
To compare different mortgage programs, put the values for different options side by side. This will give you a better estimate of the cost of the property.
A 30-year mortgage, for instance, will have the lowest monthly amortization but it will also have the highest overall cost. If you shorten the term, the amortization will increase but the total cost of the loan will be lower.
Don’t Let a Home Loan Calculator Intimidate You
When you are planning to buy a home, you should always take the time to study your options. Part of the process you have to consider is making a choice as to your lender, the loan type, the terms, and all the small details. With terms as long as 30 years, the last thing you want is to be locked up with a bad deal.
While you have refinancing options, it’s always better to find a mortgage with agreeable terms. Doing the math may require 100% concentration but it can save you from making the wrong decisions. For starters, numbers can’t lie!
So take the time to understand what a home loan calculator is and what it does. Once you learn what everything stands for, it would be easier to review your options independently. Taking the second-guessing from the home buying process lets will help you plan ahead for the financial burden.