Almost all Americans dream of owning a home. But buying a home is a huge step that requires a lot of financial planning and calculation.
Before venturing into home buying, the first step is determining how much your mortgage loan will cost in the long run and your ability to afford it. Besides the cost and affordability, you may want to compare lenders to ensure you get the best deal before settling for one, and this is where a mortgage calculator comes in.
If you have never used a mortgage calculator and are wondering what it is and how it works, this guide is for you.
As the name suggests, a mortgage calculator is a tool for calculating a mortgage loan. It helps you as prospective homebuyers to get an idea of your home loan payments without much of a hassle which is a huge improvement from traditional methods of mortgage calculations that are complex and prone to human errors.
Online mortgage calculators' ease of use makes them a convenient option for borrowers looking to calculate mortgage estimates without needing a financial advisor, thus saving time and money.
While understanding an online mortgage calculator is important, knowing how to use the tool is even more critical. Luckily, most online mortgage calculators are pretty easy to use. All you need to do is enter the information the calculator needs, such as loan amount, interest rate, and loan term, among others.
Upon entering the information, the calculator will generate a breakdown of the mortgage costs, showing how much will be paid each month and other applicable fees. It also provides an overview of how much a loan will cost in the long run, making it the perfect tool for comparing lenders.
Some terms used in lending can be intimidating if you are a first-time mortgage borrower. So it's a good idea to know what some of the most common terms mean so that you are in better control of your borrowing.
The principal is one term you need to know, which refers to the total amount borrowed. For example, if your mortgage loan is $200,000, the principal is $200,000.
The mortgage term is another popular terminology that refers to the time within which a borrower is required to repay the loan and ranges from 5 to 30 years. The term is critical in determining the total cost of a loan, with the costs increasing with longer terms.
The interest rate is the cost of borrowing money and is expressed as a percentage of the loan amount and can either be fixed or adjustable. A down payment is an initial amount that a borrower must pay upfront before taking out the loan, usually expressed as a percentage of the loan amount. Most lenders will ask for a 20% down payment for mortgage loans meaning you will need to pay $20,000 upfront when seeking a $400,000 mortgage loan.
Besides knowing how to use a home loan calculator, you need to know what amount you can afford. Most lenders will look at factors such as your income, debt-to-income ratio, and credit score to determine your eligibility for a mortgage.Financial experts recommend that mortgage payments should not exceed 30% of your income even when you could get approval for higher limits. Keeping your mortgage repayment under 30% of your income helps ensure you don't become overwhelmed with debt, considering you will still have other financial responsibilities.