A mortgage is a legal document between a lender (such as a bank) and a debtor. The bank lends the debtor funds in exchange for a property title. The title is the lender’s property until the debtor pays for it in full.
Lenders don’t give mortgages out of the goodness of their heart. They earn interest on the cost of the loan. If you can’t pay your installments, the property is considered collateral, and the lender can take it from you. That’s why a mortgage calculator is a valuable tool. It helps you establish whether you can afford payments before you buy the property.
It can be challenging to calculate mortgage payments without understanding common mortgage terms. These are below.
Principal
The money you are borrowing from the bank. The value differs depending on your down payment and the property price.
Down Payment
The money you already have and want to apply to your mortgage. The percentage you have to come up with depends on the mortgage. Loans in the USA have down payment requirements of 3.5 percent through to 25 percent.
The more you pay up-front in the down-payment, the smaller your monthly payment will be. You would call this the loan-to-value or LTV. If a lender advertises “50% LVT,” it means you borrow half the price and come up with the other half as your down payment.
Annual Interest Rate
Even though you pay your mortgage monthly, you pay an annually-calculated interest rate. All your monthly payments include an interest rate and capital. When you first start paying a mortgage, you pay a lot more interest than capital. As you reach the end of your loan term, that balance changes.
Loan Term
The loan term is how long you have to repay your mortgage. The conditions depend on the loan you agreed to with your lender. It can also depend on fixed or variable rates. The most common are 20 and 30-year mortgages. Because interest is calculated yearly, more extended loan periods result in higher cost.
This info should give you some insight into the standard layout of a mortgage. You can now start looking at how to use the mortgage calculator. While it won’t include bank charges and costs, it offers you a basic estimate. Follow these steps for using the mortgage estimator below.
1. Enter your principal amount in the ‘amount’ field. Exclude your deposit from this figure.
2. Enter the loan term – the number of years for your mortgage.
3. Enter the interest rate. An interest calculator might be able to help with this step.
4. The calculator does all the rest. You now know what your monthly mortgage repayments will be.
The figure you get from a mortgage calculator isn’t going to be exact. It doesn’t consider any bank fees, charges, or added costs relating to documentation. With low down-payment mortgages, there are costs such as:
Insurance
If the up-front payment is 20 percent or less, many lenders want private mortgage insurance. Such a policy protects the lender in case you default on your loan. Most lenders also request coverage for natural disasters, fire, and flooding. The lower your down payment, the more protection you’ll require.
Tax
Owning property means you will most likely pay property tax. If you have a small down payment term, some lenders also set up escrow accounts. These accounts collect funds for extra expenses.
Other Products
Banks have to get something out of offering competitive lending terms. Often, they want you to sign up to something else they offer. More often, it’s another bank account or a credit card.
The interest rate and fees play a significant role in choosing a mortgage. But there are also other things to consider. Decide whether you want fixed rates or variable rate mortgages.
A fixed rate mortgage’s interest rate stays the same. Variable rate means it changes based on the bank’s rate and inter-bank market.
Many people choose fixed rates for peace of mind. You always know how much interest you will be paying. Fixed rates tend to be higher than variable rates, and you don’t enjoy rate falls. Variable rates can be flexible. When the price falls, your interest repayment falls with it. Interest can have an adverse effect as well, making you pay more if it goes up. That’s the biggest drawback.
Now, this content is empty.
A balloon payment mortgage is when you reach the end of your mortgage loan. You may find yourself with a large payment at the end of it. The balloon payment can be far higher than your monthly one. It may even run into thousands of dollars.
Some lenders break it into smaller payments, but many don’t. As they are sometimes unaffordable, they are more common in commercial property loans. If you have one for a home loan, there are ways around them. You can sell your house before the balloon payment is due. You can also refinance to spread the payments out.
Some balloon mortgages have automatic refinancing. A balloon loan is not manageable for everyone. Use a balloon payment calculator to work out how much you will need to pay.
This may sound bad, but it’s not. Balloon loans have some advantages such as low-interest rates. You can also take out a larger loan than if you went with variable or fixed rates.
Those who choose balloon payment mortgages must be cautious. It’s possible you won’t be able to sell your home before its maturity. Your home may also drop in value before it’s due. If you plan on refinancing, there is a risk here too. You might strike financial difficulty, or interest rates might go up.
If you are a senior homeowner, you might already be familiar with a reverse mortgage. Such a mortgage is where you exchange your property for money. You can release the funds tied up in your home while still being able to live in it.
A reverse mortgage enables your home to become an illiquid asset, a source of cash. You are still responsible for home maintenance, insurance, and taxes. The upside is that you don’t need to repay those funds until you sell or die. The homeowner or heirs can sell the property to repay the funds, or reimburse the balance and keep the house.
Several things dictate the money a reverse mortgage can provide. The lender will factor in your age, the interest rate, and your home value. Some governments also impose lending limits. You can receive a lump sum, monthly payments, or term payments.
There are also two types of reverse mortgages. A loan model involves a borrower taking a loan, then repaying it upon their death and house sale.
The sale model, or lifetime cash benefit, is the property ownership changing hands. The bank or lender takes ownership of your house, letting you remain there. In exchange, you receive a trickle of money over a set period.
