Mortgages are of many types but the term is generally used to refer to a residential mortgage. In a residential mortgage, the homebuyer pledges the home he/she is buying to the lender. In a case of foreclosure, the lender may evict the homeowner and sell the home to clear the mortgage debt amount. To avoid circumstances of foreclosure, it is very important to consider the factors that affect your mortgage.
A mortgage comprises of two components, the Principal (or the loan amount) and the Interest Payable, both these components together make up the Total Payable or the total cost of the mortgage. These two components also make up each monthly payment. In a standard mortgage, the homebuyer initially makes a larger payment towards interest (in most banks nearly 70% of the first payment amounts to interest) and a smaller payment (if 70% of the sum is paid towards interest, the remaining would be 30% that is contributed) towards the principal. As time goes by the principal reduces, this means that the monthly interest payable also reduces and the homebuyer can allot more money towards the Principal and lesser towards interest.
The Interest Only Mortgage Calculator has three fields – loan amount, interest rate and term. The loan amount is referred to as the Principal and the total cost of interest on the loan is referred to as the Interest Payable. After you enter the specifics of the mortgage in these fields, press enter or click anywhere on the screen. The calculator calculates the Interest Payable, Total Payable and arrives at the Monthly Payment depending on the duration of the term. Each Monthly Payment comprises of an amount contributed towards the principal and the interest.
All you need to do is enter your loan amount, the interest rate and the term of the loan and all the parameters will be calculated.
The Mortgage Calculator has a see-saw, a pie-chart, and a comprehensive payment schedule that gives you a clear breakup of the entire payment.
The see-saw has a home on one side and a piggy bank on the other side. Depending on the interest payable, the home and the piggy bank change their position on the see-saw. The see-saw could represent 3 types of financial investments.
Scenario 1 - When the home is up and the piggy bank is on the lower side: This means that the mortgage is light on your pocket and your savings are higher. It indicates that the Interest Payable is lower than the Principal amount and it is a good financial investment as you will start building equity on the home soon.
Scenario 2 - When the piggy bank is up and the home is down: This means that the mortgage is heavy on your wallet. As soon as the home moves down, the weather in the background turns dark to indicate that the mortgage won’t make a very good investment. This happens when the Interest Payable is higher than the Principal amount.
Scenario 3 - When the see-saw is at a 180-degree angle. This happens when the Principal amount and the Interest Payable are equal. The means that your savings on the mortgage aren’t high or low.
The pie chart is positioned below the see-saw. It displays the monthly payment, as well as the breakup of the total payable in terms of percentage contributed towards the principal and interest. The blue part represents the principal while the red represents the interest. On the right side of the pie-chart, you can see the amounts for the Principal, Interest Payable and the Total Payable.
The payment schedule of the mortgage amortization calculator gives you the option to pick the month and year in which you’d like your mortgage to begin and the schedule changes in accordance. It has two features, the graph, and the table.Graph
The graph below shows the amortization of the mortgage, it represents the entire term of the mortgage. Each bar in the graph represents one year in the mortgage term. The bar at the extreme left represents the year in which your mortgage will begin while the one at the extreme right would represent the last year of the term. Place the cursor over the bar representing any one year and you can see the principal amount paid and the total amount paid for that year. If you place the cursor on the red marking on any bar, you will see the balance of the principal amount and the percentage of the principal that would be paid off by the end of that year.Table
The table below the graph contains a comprehensive split up of the entire payment. There are individual columns in the table that are dedicated to different aspects in the break up of the mortgage payment.The first column consists of all the years in the mortgage term, the second column consists of the yearly principal amount paid, the third column shows the amount paid towards interest in each year, and the fourth column shows the total payment for each of the years. There are two additional columns that help you understand the status of your mortgage at the end of each year. The fifth column shows the balance of the payment at the end of each year and the sixth column shows the percentage of the principal that has been paid off at the end of each of the years. If you click on any of the years in the first column, the table will drop down and show you the month wise break up for each of the column heads. The Mortgage Calculator gives you an overall picture as well as the most minute details of your mortgage cost.
To build equity on your home, you need to ensure that you avoid spending too much money on interest. The interest rates may differ from one lender to another and depend on the term of the mortgage. Before stepping into a mortgage, it’s always good to compare the interest rates of 2-3 lenders and also know the exact break up of the principal and the interest. What better way to do that than a mortgage calculator? It saves you the time and effort from creating spreadsheets and there’s absolutely no room for an error in the accuracy.
Fill in the fields for principal and interest rate near the see-saw. Scroll down to the schedule and change the month and year in which your mortgage began. You’ll get a detailed schedule that shows you exactly what percentage of the mortgage has been paid up and how much is remaining. You can take a print out of the schedule and keep it for future reference.
There are many types of mortgages and it is essential to understand the terminology and pick a mortgage that suits your situation. The prime factor that differentiates one mortgage from another is the interest rate; which is subject to market conditions. The interest rate for a mortgage ranges between 3.31% to 4.32% (based on the highest and lowest interest rates since 2013). However, if there are any events that drastically affect the market, the interest rates could go higher or drop lower. Choosing a mortgage that doesn’t suit your financial capacity could lead you down the wrong way. By mortgage, we mean a home loan. In the literal sense, the word mortgage only refers to the right to foreclose on a property in case the buyer is unable to make his/her monthly payments. Some of the preferred mortgages used to buy a home are:
In a fixed-rate mortgage, you make the exact same payment throughout the term of the loan. The term may vary from person to person depending on their ability to repay the debt. In these mortgages, it is easy to calculate the monthly payment. The lender arrives at the monthly payment depending upon the loan amount, interest rate and the term of the loan. These mortgages usually last for a 15 or 30 year period. Sometimes, homebuyers pay more than what is required and become debt free sooner. This is the most widely taken mortgage.
Top banks offering fixed-rate mortgages: JP Morgan Chase, Bank of America, Wells Fargo, Citibank, etc.
These mortgages are similar to fixed-rate mortgages, but the interest rate is subject to change at some point in future. Along with a change in the interest rate, even your monthly payment changes. If you have luck on your side, the interest rates could drop and reduce your monthly payment, but if it happens the other way round, your monthly payment will be higher. However, there are certain limits on how much the interest rate can move. Each time the rate changes, the lender recalculates the monthly payment. The risk factor that comes with this loan is that you don’t know exactly how much your monthly payment would be ten years down the line and whether or not you’ll be able to afford it.
Top banks offering adjustable-rate mortgages: Bank of America and Wells Fargo
The name explains the loan. In an interest only loan, the homeowner only pays a monthly interest on the loan. The monthly payment is small and the term for these loans usually vary from 5-7 years. They’re available in both fixed-rate and adjustable rate mortgages. But the disadvantage is that you aren’t actually repaying your debt or building equity on your home. You will still have to repay the debt at some point in time. These loans are useful for short-term periods during financial instability.
Institutions offering Interest Only ARM: Union Bank, Bank of Internet USA, New American Funding, etc
Balloon loans require that the homebuyer pays off the loan with a large balloon payment at the end of the term. In these loans, there are no monthly payments. You will have to pay the entire debt amount along with the interest (the balloon payment) around 5 to 7 years down the line. These loans are good for temporary financing, but it is risky to assume that you will have access to that big a sum when the balloon payment is due.
These loans let you swap your mortgage for a new one if you find a better deal. When you refinance a mortgage, the new mortgage will pay off the old one. The costs involved in these loans can be high because of the closing costs involved. Typically homebuyers swap their adjustable-rate mortgage with a fixed rate mortgage. Of all these above mortgages, fixed-rate mortgages are not only the most popular type of mortgages but they are also the safest mortgages. Most homebuyers who refinance their loans move to a fixed-rate mortgage as it is easier to pay off a mortgage that has a fixed interest rate and ensures that the principal amount as well gets paid off, thereby clearing the debt. People also refinance their mortgages when they find a lender who is offering a lower interest rate. If you can save at least 1% to 2% by refinancing your mortgage, you should go ahead with it.
Most people tend to consider the mortgage only in terms of monthly payments and forget about the downpayment and closing costs. These factors also affect the total cost of a mortgage, a slight change in one of the factors can impact the total cost of your mortgage. Read on to find out what factors affect your mortgage and how.
The percentage of downpayment that you make plays a huge role in the structure of your mortgage. If you make a downpayment that does not equal to 20% of the principal amount, you will require a PMI (Private Mortgage Insurance) which adds up to your monthly mortgage payment. This insurance does not benefit you as a homebuyer but acts as a security for your lender to recover their funds in case you stop making the payments. As a homebuyer, it works best if you make a downpayment of at least 20%. If you can afford anything more than 20%, all the better.
The amount of downpayment you make affects your total interest. Larger the percentage of downpayment, lower the total interest paid. If you don’t have enough money to pay 20% of the home’s cost as downpayment, you could try sourcing funds from your parents, or a sibling who is earning and can afford to help you out. Check whether your employer is willing to give you an advance and have a small amount deducted from your pay every month.
Higher the interest rate, higher the monthly payment. As important as it is to find the best home within your budget, it is equally important for you to find the right mortgage with the lowest interest rate possible. You need to make sure that the total interest is in fact much lower than the principal amount.
If you have a low-interest rate, your total cost of interest will reduce. This means that you will be able to clear your mortgage faster.
It’s simple Math, if you have a long mortgage term you will end up paying more money towards interest. So if you find a mortgage lender or a bank with a lower interest rate, your mortgage term can be reduced. Preferably, you should choose the shortest term that you can afford as this will reduce the total cost of your interest. An ideal situation would be to make a large downpayment, find a lender with a relatively low-interest rate so that you can pick a shorter term and gain financial independence at the earliest.
Lenders always tell you how much you can borrow, but they never tell you how much you should borrow. In the end, it is your decision to finalize on how much to spend on your home. The decision-making process does not stop at coming up with a budget and deciding on a home. You also need to decide on how big a downpayment you should make and how much money you should borrow. Some of the common ways that mortgage lenders use to calculate how much you can borrow is by calculating the percentage of Gross Monthly Income and the Debt-to-Income ratio.
The majority of lenders follow a thumb rule that the monthly mortgage payment should not exceed 28% of your gross monthly income. They do this to ensure that your payments are not stretched too far.
The Debt-to-Income ratio is used to calculate the percentage of your monthly income that is allocated towards repaying your debts. These debts may include car payments, credit cards, and other loans. Most lenders advise that your total debts shouldn’t exceed 36% of your gross monthly income.
However, both these ratios are calculated on your gross monthly income when you will be making your monthly payments from your net monthly income i.e., your income after deducting taxes, social security, child support, etc. This means that your ability to afford these payments would actually be quite different from what they look like on paper. So it’s important that you don’t get carried away by these ratios. Just because the lenders say that you can avail a $200,000 loan, that doesn’t mean that you should.
For example, let’s say your gross monthly income is $12,500. Since most lenders follow the rule that your mortgage shouldn’t exceed 28% of your income, that would mean that your maximum monthly payment would be $3,500, and that doesn’t sound too bad. But after taxes and deductions that amount to nearly 26% of your gross income, your net monthly income would be $9,034.02. After you pay your monthly mortgage payment, you would be left with $5,534.02 to live on for the rest of the month. Make sure to factor in your car payment, student loans, credit card bills etc, before you sign up for a mortgage that you will not be able to afford.
|Lower Income Groups||Middle Income Groups||Higher Income Groups|
|Gross Yearly Salary||50,000||80,000||150,000|
|Gross Monthly Salary||4,166.67||6,666.67||12,500|
|Deductions & Tax||788.65||1,604.90||3,465.98|
|Net Monthly Income||3,378.02||5,061.77||9,034.02|
Don’t cut your mortgage too close to your income, remember that these payments go on for many years. You may also have additional expenses like repairs, home improvement costs and a few vacations to throw in during the term of your mortgage. Use a tax calculator to find out your net monthly income so that you know which numbers you will actually be making your monthly payment from. High monthly payments affect different income groups in different ways. However, regardless of which income group you belong to, it does affect your lifestyle.
Low Income Groups: If you fall under this group, a high monthly payment can affect their lifestyle adversely. It would mean living on the bare necessities and sacrificing a lot. Your child may not be able to take up any extra curricular activities as a child because almost all your income is directed towards the mortgage.
Middle Income Groups: If you are someone who falls under this group, you may have to sacrifice on things like reducing the number of family outings, small vacations and postpone buying a new car. Home improvements will also have to be planned for months in advance.
High Income Groups: People who fall under this group face a different kind of issues. They may need to stall buying a luxury car or reduce the number of international trips that they make in a year.
In case you miss a mortgage payment or you’re slightly overdue, you don’t need to worry about foreclosure. Foreclosure takes place in extreme cases when the borrower is unable to continue making his/her monthly payments. However, you could face other issues if your payment is late. If you know that you won’t be able to make a payment on time, it’s best to contact your lender and inform them about the delay and its cause. The possible solutions they offer could be:
Mortgage payments need to be made by the 1st of the month, but there’s usually a grace period of 15 days. Once the grace period is over, late charges are usually applied and your payment might be considered delinquent. You may receive a call and/or order anytime from the 16th day to inform you about the deferred payment. If the payment is not made by the 30th day, that is when most lenders report the missed payment to a credit bureau. After this, your credit score takes a hit. The payment is considered in default when it reaches the 30 day mark. If the payment hasn’t yet been made somewhere between 45 to 60 days, you will receive a breach letter for your mortgage that will inform you that foreclosure may be heading your way if the payment isn’t made soon.
To get the best quote for your mortgage, you need to know all the sources from where you can borrow money. It’s always good to get at least three quotes and compare them before you finalize on your lender.
Banking and credit institutions offer loans to customers and earn revenue from origination fees, interest and closing costs. The money in checkings and savings accounts of their customers need to be invested, and lending that money out is one way of investing that money.
Mortgage brokers offer loans from multiple lenders. They have access to numerous sources of financing and help you select a lender on the basis of interest rate and other features. They either charge you an origination fee, collect a fee from the lender, or a combination of the two.
Online Lenders either fund loans through their internal sources or they act as mortgage brokers. Their services are very convenient as everything is done virtually.
The government and local organizations offer loan programs that help people out with their loans. These programs make it easier to get your loans approved. Some of them even offer incentives that make owning a home affordable. Few of the most popular loan programs are:
These programs make it easier for homebuyers to buy their first home. They are typically developed by the local government and nonprofit organizations. They offer help with the downpayment, interest rates, and more. These programs are tough to find and usually have underlying terms that limit how much you can profit when you sell your home.
Loans that are insured by the Federal Housing Administration (FHA) are popular among homebuyers who want to make a small downpayment. It is possible to avail a loan with a downpayment as little as 3.5% and they are easy to qualify for.
These loans are guaranteed by the Department of Veteran Affairs (VA). They are made available to veterans, servicemen, and eligible spouses. These loans allow you to borrow without mortgage insurance and downpayment (in certain cases). They make it possible to borrow with less-than-perfect credit, limited closing costs and they are assumable (allow someone else to take over the payment if they are eligible.
The cost of a mortgage bears a burden on your monthly income. In addition to your mortgage, if you have a car payment, student loans or any other such expenses, it is likely that you will have very little money at your disposal at the end of each month. After investing a huge chunk of your income on your home, it’s advisable to walk the extra mile and make sure that your home and whatever is in it is well protected.
A home insurance will protect your home from external factors. Suppose there’s a windstorm and a part of your roof gets damaged, apart from a small deductible fee, your home insurance will have the repair costs covered. However, if your air conditioning gets damaged due to regular wear and tear, the repair costs won’t be covered by your home insurance. Such costs are covered by home warranty. After putting quality effort into finding the right home and a mortgage that suits you, don’t let your home insurance or home warranty give way. Don’t compromise, choose a home warranty service from the best home warranty companies across the US and compare their plans before you take your pick.