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A mortgage calculator is a smart first step to buying a home because it breaks down a home loan into monthly house payments, based on a property’s price, current interest rates, and other factors. This can help you figure out if a mortgage fits in your budget, and how much house you can afford comfortably.
The calculator also allows you to easily change certain variables, like where you want to live and what type of loan you get. Plug in different numbers and scenarios, and you can see how your decisions can affect what you’ll pay for a home.
Learn more: How Much Home Can I Afford?
A mortgage is a loan to help you cover the cost of buying a home. Mortgages are a crucial component of home buying for most people; they help make this expensive purchase possible by having a large financial institution like a bank or lender loan home buyers the money.
Once you have a loan, you pay it back in small increments every month over the span of years or even decades. It’s essentially a long, life-changing IOU that helps many Americans bring the dream of homeownership within reach.
Learn more: What Is a Mortgage? Home Loan Basics Explained
A mortgage payment typically consists of four components, often referred to as PITI: principal, interest, taxes, and insurance.
In addition to these costs, your house payment might also include these expenses:
Learn more: Your Mortgage Payment, Explained
When you apply for a mortgage to buy a home, lenders will closely review your finances, asking you to share bank statements, pay stubs, and other documents. Here are the main things they review to determine how much you can borrow:
Lenders will compare your income and debt in a figure known as your debt-to-income ratio. Your debt-to-income (DTI) ratio is the percentage of gross income (before taxes are taken out) that goes toward your debt.
To calculate your DTI ratio, divide your ongoing monthly debt payments by your monthly income. As a general rule, to qualify for a mortgage, your DTI ratio should not exceed 36% of your gross monthly income.
Lenders will also review other aspects of your finances, including the following:
For an instant estimate of what you can afford to pay for a house, you can plug your income, down payment, home location, and other information into a home affordability calculator.
Mortgages come in a wide variety to suit home buyers’ circumstances. Here are the main types, and their pros and cons:
Here are some other things to consider to help you decide which type of loan is right for you:
Learn more: Types of Home Loans: Which One Is Right for You?
If you’ve crunched the numbers on a house you hope to buy but feel the monthly mortgage payments are higher than you’re comfortable with, don’t worry—there are ways to lower your mortgage payments. Here are some ideas.
Learn more: 5 Ways To Score a Lower Mortgage Payment
Mortgage pre-approval is a statement from a lender who’s thoroughly reviewed your finances and decided to offer you a home loan up to a certain amount. Pre-approval is a smart step to take before making an offer on a home, because it will give you a clear idea of how much money you can borrow to pay for a house. Pre-approval is also a great way for you to stand out from other buyers in a competitive marketplace, since it proves to sellers that you can follow through on your offer and close the deal.
Mortgage pre-approval should not be confused with mortgage pre-qualification, where you tell a lender about your income and debts but don’t provide documentation to verify your claims. Pre-qualification is a way lenders can give you a ballpark idea of what amount you could borrow, but it’s no guarantee you’ll get the loan until you go through the more thorough process of pre-approval.
If you’re hoping to buy a home, weeks or months could pass before you find a house and negotiate your way to an accepted offer. But mortgage pre-approval does not last indefinitely, since your financial circumstances could change by the time you close your real estate deal. As such, you’ll want to know how long pre-approval lasts before it expires.
Although there is no set time frame, the custom within the real estate industry is that mortgage pre-approval is valid for between 90 to 180 days. Make sure to ask your lender how long your pre-approval lasts, or look for this expiration date on your pre-approval letter.
If your mortgage pre-approval is set to expire before you’ve completed the home-buying process, this does not mean you have to start the pre-approval application process from square one. In most cases, you can extend your pre-approval by providing updated financial statements to your lender to show there have been no drastic changes to your circumstances that might affect your ability to afford a loan.
Learn more: A Complete Guide To Getting a Mortgage
A bi-weekly mortgage is a mortgage in which the borrower makes half of their monthly mortgage payment every two weeks, rather than paying the full payment amount once every month. So if you paid monthly and your monthly mortgage payment was $1,000, then for a year you would make 12 payments of $1,000 each, for a total of $12,000. But with a bi-weekly mortgage, you would make 26 payments of $500 each, for a total of $13,000 for the year. This can help the borrower pay off their mortgage loan sooner and reduces the total amount of interest paid over the life of the loan.
Escrow is a legal arrangement where a third party temporarily holds money on behalf of a buyer and seller in a real estate transaction.
Homeowners insurance is a type of property insurance. It protects you from damage to your home or possessions. Homeowners insurance also provides liability insurance if accidents occur in your home or on the property.
The loan amount is the amount of money you plan to borrow from a lender.
The loan-to-value ratio (or. LTV) is a factor looked at by lenders when qualifying a borrower for a mortgage loan. The LTV compares the amount of a loan to the value of the asset being financed: the amount you are borrowing divided by the price of the property being purchased or financed. So the LTV is 66.66% on a $300,000 house where the amount being borrowed to purchase it is $200,000 (meaning the down payment is $100,000). The lower your LTV the easier it will be to qualify for a mortgage loan. For example, many conventional loans require that your LTV be no higher than 80%. Of course, the greater your down payment amount, the better/higher your LTV will be.
A long-term mortgage is a loan with a longer length of time. Long-term mortgages typically have higher rates but offer more protection against rising interest rates. Penalties for breaking a long-term mortgage can be higher for this type of term.
A lump-sum payment is when you make a one-time payment toward your mortgage, in addition to your regular payments. How much of a lump sum payment you can make without penalty depends on the original mortgage principal amount.
Your monthly mortgage payment has four components: principal, interest, taxes, and insurance.
A mortgage rate is the rate of interest charged on a mortgage. The lender determines the mortgage rate. They can be either fixed, staying the same for the mortgage term or variable, fluctuating with a reference interest rate.
Mortgage refinance is the process of replacing your current mortgage with a new loan. Often people do this to get better borrowing terms like lower interest rates. Refinancing requires a new loan application with your existing lender or a new one. Your lender will then re-evaluate your credit history and financial situation.
A mortgage term is the length of time you have to repay your mortgage loan. Mortgage terms can range from 15 to 30 years or even longer.
A long-term mortgage is a loan with a shorter length of time. Short-term mortgages typically have lower interest rates. Short-term mortgages offer less protection against changing interest rates because you need to renew them more frequently.