Mortgage Calculator

Understanding Your Mortgage Payment

Our mortgage calculator helps you estimate your monthly home loan payment accurately. Whether you're a first-time homebuyer or looking to refinance, understanding how mortgage payments work is essential for making informed financial decisions.

What is a Mortgage?

A mortgage is a loan secured by property, usually real estate property. Lenders define it as the money borrowed to pay for real estate. In essence, the lender helps the buyer pay the seller of a house, and the buyer agrees to repay the money borrowed over a period of time, usually 15 or 30 years in the U.S.

Each month, a payment is made from buyer to lender. A portion of the monthly payment is called the principal, which is the original amount borrowed. The other portion is the interest, which is the cost paid to the lender for using the money. There may be an escrow account involved to cover the cost of property taxes and insurance. The buyer cannot be considered the full owner of the mortgaged property until the last monthly payment is made.

In the U.S., the most common mortgage loan is the conventional 30-year fixed-interest loan, which represents 70% to 90% of all mortgages. Mortgages are how most people are able to own homes in the U.S.

Key Components of a Mortgage Payment

A mortgage usually includes the following key components. These are also the basic components of our mortgage calculator:

• Loan amount - The amount borrowed from a lender or bank. In a mortgage, this amounts to the purchase price minus any down payment. The maximum loan amount one can borrow normally correlates with household income or affordability.
• Down payment - The upfront payment of the purchase, usually a percentage of the total price. This is the portion of the purchase price covered by the borrower. Typically, mortgage lenders want the borrower to put 20% or more as a down payment. In some cases, borrowers may put down as low as 3%. If the borrowers make a down payment of less than 20%, they will be required to pay private mortgage insurance (PMI).
• Loan term - The amount of time over which the loan must be repaid in full. Most fixed-rate mortgages are for 15, 20, or 30-year terms. A shorter period, such as 15 or 20 years, typically includes a lower interest rate.
• Interest rate - The percentage of the loan charged as a cost of borrowing. Mortgages can charge either fixed-rate mortgages (FRM) or adjustable-rate mortgages (ARM). Our calculator handles fixed rates only. Mortgage interest rates are normally expressed in Annual Percentage Rate (APR).

Costs Associated with Home Ownership and Mortgages

Monthly mortgage payments usually comprise the bulk of the financial costs associated with owning a house, but there are other substantial costs to keep in mind. These costs are separated into two categories, recurring and non-recurring.

Recurring Costs

Most recurring costs persist throughout and beyond the life of a mortgage. They are a significant financial factor. Property taxes, home insurance, HOA fees, and other costs increase with time as a byproduct of inflation.

• Property taxes - A tax that property owners pay to governing authorities. In the U.S., property tax is usually managed by municipal or county governments. On average, Americans pay about 1.1% of their property's value as property tax each year.
• Home insurance - An insurance policy that protects the owner from accidents that may happen to their real estate properties. The cost of home insurance varies according to factors such as location, condition of the property, and the coverage amount.
• Private mortgage insurance (PMI) - Protects the mortgage lender if the borrower is unable to repay the loan. In the U.S. specifically, if the down payment is less than 20% of the property's value, the lender will normally require the borrower to purchase PMI. The annual cost typically ranges from 0.3% to 1.9% of the loan amount.
• HOA fee - A fee imposed on the property owner by a homeowner's association (HOA). Condominiums, townhomes, and some single-family homes commonly require the payment of HOA fees.
• Other costs - Includes utilities, home maintenance costs, and anything pertaining to the general upkeep of the property. It is common to spend 1% or more of the property value on annual maintenance alone.

Non-Recurring Costs

These costs aren't addressed by our calculator, but they are still important to keep in mind when budgeting for homeownership:

• Closing costs - The fees paid at the closing of a real estate transaction. These are not recurring fees, but they can be expensive. It is not unusual for a buyer to pay about $10,000 in total closing costs on a $400,000 transaction.
• Initial renovations - Some buyers choose to renovate before moving in. Examples of renovations include changing the flooring, repainting the walls, updating the kitchen, or even overhauling the entire interior or exterior.
• Miscellaneous costs - New furniture, new appliances, and moving costs are typical non-recurring costs of a home purchase. This also includes repair costs.

Early Repayment and Extra Payments

In many situations, mortgage borrowers may want to pay off mortgages earlier rather than later, either in whole or in part, for reasons including but not limited to interest savings, wanting to sell their home, or refinancing.

Early Repayment Strategies

Aside from paying off the mortgage loan entirely, typically, there are three main strategies that can be used to repay a mortgage loan earlier:

• Make extra payments - This is simply an extra payment over and above the monthly payment. Any extra payments will decrease the loan balance, thereby decreasing interest and allowing the borrower to pay off the loan earlier.
• Biweekly payments - The borrower pays half the monthly payment every two weeks. With 52 weeks in a year, this amounts to 26 payments or 13 months of mortgage repayments during the year.
• Refinance to a loan with a shorter term - Refinancing involves taking out a new loan to pay off an old loan. In employing this strategy, borrowers can shorten the term, typically resulting in a lower interest rate.

Benefits and Drawbacks of Early Repayment

Benefits include:

• Lower interest costs over the life of the loan
• Shorter repayment period
• Personal satisfaction of being debt-free sooner

Drawbacks to consider:

• Possible prepayment penalties in some mortgage contracts
• Opportunity costs - the money could potentially earn more if invested elsewhere
• Capital locked up in the house that could be used for other needs
• Loss of mortgage interest tax deduction for those who itemize

Brief History of Mortgages in the U.S.

In the early 20th century, buying a home involved saving up a large down payment. Borrowers would have to put 50% down, take out a three or five-year loan, then face a balloon payment at the end of the term. Only four in ten Americans could afford a home under such conditions.

During the Great Depression, one-fourth of homeowners lost their homes. To remedy this situation, the government created the Federal Housing Administration (FHA) and Fannie Mae in the 1930s to bring liquidity, stability, and affordability to the mortgage market. Both entities helped to bring 30-year mortgages with more modest down payments and universal construction standards.

These programs also helped returning soldiers finance a home after the end of World War II and sparked a construction boom in the following decades. By 2001, the homeownership rate had reached a record level of 68.1%.

Today, both FHA and Fannie Mae continue to actively insure millions of single-family homes and other residential properties, making homeownership accessible to millions of Americans.