A mortgage calculator is used to determine your monthly mortgage payment. They don't include taxes, insurance or condo fees because they vary depending on your city and state. Calculate your mortgage for free below:
Your borrowing power is the amount you can afford to borrow from the bank for a mortgage loan, also known as buying power. Since there are many variables it's difficult to give you an exact figure such as $200,000. The home you find will vary in price based on negotiations, your taxes will vary, there may be a land lease or condo fee and the interest rate may go up or down by the time you purchase. Keeping that in mind, try to find homes that you like with low taxes and a low condo fee because it will increase your available mortgage amount. You can calculate your borrowing power with a mortgage calculator above.
Monthly loans include your car loan, school loan, credit card monthly payment, personal loans and all other loans you pay on a monthly basis. The bank will not let your new mortgage payment and monthly taxes go above that calculated amount.
Debt to Income Ratio
Your debt to income ratio should be below 40% to get approved for a mortgage loan. In order to stay within 40% follow the steps below:
Remember to include your new monthly mortgage payment and monthly taxes. You do not have to include monthly expenses such as heat, electric and groceries, only the official loans that show up on your credit report.
A mortgage payment amortization schedule calculates the amount of principal and interest in each monthly payment you make. The most important piece of information to gain from an amortization schedule is the difference between principal and interest. Look more into that subject under Monthly Mortgage Payment. Watch your loan balance drop month by month and add principal payments to pay it off faster.
1. Fill in your mortgage information
2. Click the Breakdown tab on the right
3. P = Principal and I = Interest
4. P + I = Monthly mortgage payment (The total will always be exactly the same)
4. Try lowering your loan term to 15 years from 30 years to see how much the Principal increases
Current Interest Rates
30 Year Fixed Rate: 4%
15 Year Fixed Rate: 3%
10 Year Fixed Rate: 3%
1 Year ARM Rate: 2.625%
3 Year ARM Rate: 2.75%
5 Year ARM Rate: 2.85%
Fixed Rate Mortgage
A fixed rate mortgage gives you the exact same monthly mortgage payment for the entire length of the loan. It never adjusts unless you refinance. Fixed rates are offered over 30 years, 15 years and 10 years standard.
Adjustable Rate Mortgage
Adjustable rate mortgages, also known as ARM rates, adjust once per year after the fixed term expires. a "5 year ARM rate" is fixed for 5 years, then adjusts each year after that. It could go up or down depending on the prime rate set by the government. Adjustable rates are for gamblers because you're hoping that your monthly payment will lower when the current interest rates lower.
Interest Only Mortgage
An interest only mortgage avoids principal payments for 5 years. Your payment will be significantly lower for the first 5 years of the mortgage loan. However, at the end of 5 years you still owe the full amount of the mortgage you signed your name to. At that point, your full mortgage amount needs to be paid over 25 years, which means your payment will be higher than what it would have been if you opted into a fixed rate mortgage.
Interest only loans operate with adjustable interest rates as well. After the 5 year mark you will be subject to an increased or decreased interest rate.
Monthly Mortgage Payment
Principal is the amount of money that lowers your total loan balance. The rest of the payment is interest. The principal amount lowers your total loan and the interest goes to the bank. As the years go by your principal amount increases and your interest amount lowers. An amortization schedule calculator will calculate your monthly mortgage payment with the principal and interest in separate columns. Scroll up and see "Amortization Schedule".
When you make your 1st mortgage payment you're paying 5% on $200,000 ($833.33). After you payment clears the loan balance lowers from $200,000 to $199,500, or so. Therefore, your 2nd mortgage payment will be 5% on $199,500 ($831.25). It will continue to lower each month which changes the amount of interest each time.
A 20% down payment is ideal because you'll avoid PMI (Private Mortgage Insurance). PMI costs about $50 per $100,000 of mortgage loan, and lasts until one of two things happen:
1. 20% of your mortgage loan is paid down from the original purchase price
2. Your home appreciates in value, you prove it with an appraisal, and your loan is less than 80% of the appraisal amount
Mortgage loans are obtained every day with 3-5% down payments, but don't forget closing costs. If your down payment amount is tight, try to negotiate them into your Purchase and Sale agreement. After you've gone back and forth, accept your seller's offer with one exception, $5,000 of the sale price goes towards closing costs.
A 20% down payment is necessary to avoid PMI (Private Mortgage Insurance). Unfortunately, there are no magic tricks. Banks used to offer "piggy-back" loans as a loop hole, but they're aren't offered by many anymore. See more under Down Payment above.
Add Principal to Monthly Payment
Use the calculator below to see how many years get chopped off your mortgage loan when you add a few dollars to your monthly payment. You can send additional principal payments to the same address you send your mortgage payment. It's helpful to include a memo note on the check, "Principal Payment Only", but it's not necessary.
Types of Loans
A credit card is considered a loan because you're able to access the total available credit at any point in time. Once you use the funds you can pay the bill within 30 days without any interest charges. However, if you decide to only pay the minimum payment, you'll be charged interest between 12% and 25% annually.
Apply for a Credit Card
Car loans, or auto loans, come with low interest rates because they're tangible items that can be repossessed by the bank in order to get their money back. Personal loans and credit cards don't have a home or car to take from you if you neglect to pay the bill. Therefore, car loans are considered low-risk to the bank while personal loans are considered high-risk.
Apply for a Car Loan
Personal loans are risky and, therefore, come with high interest rates. If you can't pay your bill it's hard for the bank to get their money back. They will most definitely try to collect their money, but it may end up going through a collections agency which means the bank lost money on their investment. If, however, you have a car or home that's paid off you can use that as collateral to get a lower interest rate. Since the bank has something tangible to take from you if you default, your loan is considered less risky.
Obtaining a line of credit is similar to getting a credit card. You're given an available amount of spending to use at your convenience and you only pay interest on the funds that you're currently using. If you have a $20,000 line of credit and you've only used $5,000 then you'll only pay interest on $5,000. A personal loan on the other hand gives you the full amount of $20,000 immediately and you make a monthly payment to pay off your loan within a certain period of time (usually 5 years).
Home Equity Loan
A home equity loan is only available to home owners that are living in their home and have equity. 100% equity means your home is paid off, 20% equity means your mortgage loan is 20% paid off and so on. Since 2010 banks are only giving home equity loans to home owners with more than 20% equity. If you have 30% equity the bank will give you 10% of it as a loan. 20% equity will always have to remain in the home in case the value of the home decreases.
If you have an IRA or 401K you can give yourself a loan and pay yourself back with interest. You can apply for the loan through the financial institution that holds your IRA account. Typically, you can get a loan for up to 50% of the total amount and pay it back over 1-5 years.
If you default on the loan, it will be as if you simply withdrew money. That means you'll need to pay taxes and pay a 10% penalty fee for withdrawing your funds before you're 65 years old.
Trusted PayDay Loan
Risky, risky, risky!Trusted PayDay loans are short term loans that should only be used to cover yourself until you get paid next week or next month. They can't be scheduled out for more than 3 months and monthly payments aren't the way of paying off these loans. If approved, you'll be given a chunk of money up to $1,000 and it needs to be paid, in full with interest, before the expiration date. Read the fine print to see what penalties you'll be given for defaulting.
Risky, risky, risky! Quick Cash loans are short term loans that should only be used to cover yourself until you get paid next week or next month. They can't be scheduled out for more than 3 months and monthly payments aren't the way of paying off these loans. If approved, you'll be given a chunk of money up to $1,000 and it needs to be paid, in full with interest, before the expiration date. Read the fine print to see what penalties you'll be given for defaulting.
Risky, risky, risky! Cash Advance loans are short term loans that should only be used to cover yourself until you get paid next week or next month. They can't be scheduled out for more than 3 months and monthly payments aren't the way of paying off these loans. If approved, you'll be given a chunk of money up to $1,000 and it needs to be paid, in full with interest, before the expiration date. Read the fine print to see what penalties you'll be given for defaulting.
Risky, risky, risky! Check Into Cash has short term loans that should only be used to cover yourself until you get paid next week or next month. They can't be scheduled out for more than 3 months and monthly payments aren't the way of paying off these loans. If approved, you'll be given a chunk of money up to $1,000 and it needs to be paid, in full with interest, before the expiration date. Read the fine print to see what penalties you'll be given for defaulting.
Before buying your first home you should scroll up and view Borrowing Power and Debt to Income Ratio to see how much you can afford. The amount you can afford increases when your interest rate lowers. It also increases when your taxes, condo fee and insurance payments are lower. Your mortgage payment is the largest portion of the bills associated with your new home, however you should still pay close attention to the rest of the fees.
As you can see, both scenarios equal the same total monthly payment. However, Home Option 2 gives you a more expensive home. You may not always be able to find homes with cheap taxes and condo fees, but it's important to understand during your search for a home.
Buying 2nd Home / Investment
Buying a 2nd home will require you to put down 20% unless you plan on moving into the new home immediately after closing. If you want to move into the new home and it's an upgrade from your current home, most lenders will allow a down payment of 5% with additional PMI payments. You cannot include any potential rental income in your finances to get approved for your loan. You must be able to afford your current payment, taxes and insurance along with the new monthly payment, taxes and insurance with less than a 40% debt to income ratio.
1. 20% down payment: (5% if you move in at closing)
2. 6 months of reserves: 6 months of your mortgage payment and monthly taxes need to be in an IRA or savings account
3. Cannot include potential rent even if you have a signed lease: Rental income is only included as personal income when it's been rented for more than 6 months.
4. Subject to a higher interest rate for investment properties
Buying a Foreclosure
Buying a foreclosure takes time but you could save a lot of money. A foreclosure is owned by the bank and they're ready to sell it as soon as possible! Don't get it confused with a short sale. A short sale property is still owned by the seller and they're trying to sell the property for less than they owe the bank, hence "short sale". Purchasing a foreclosure is much easier because the bank owns it and you negotiate with the bank directly. They may take some time to answer you, so make you best offer the first time around.
Renting VS Buying
Is buying better than renting? Sometimes, but not always. Renting can prove to be cheaper if you like to move around a lot. In order to buy a home and sell it for a profit, you'll have to live there for at least 5 years. Even after the 5 year mark you'll be subject to appreciation or depreciation, which means the home will be worth more or less at the time you sell. Hopefully more.
The only "savings" that will come from owning a home is the principal portion of the mortgage payment. Everything else is wasted just like a rental payment. Appreciation can also play a big factor in a good economy, but it's hard for a home to appreciate enough for you to turn a profit after living there for only 5 years.
Real estate is a long term investment. Buying a home and living in it for many years will prove to be much smarter than renting for many years. However, there are a lot of variables to consider before deciding which option is less expensive if your term of years is less than ten.
Remember, owning a home is a luxury that you can consider an expense compared to renting an apartment. If you end up exactly even after 5 years of owning a home, just realize that you lived in a home for 5 years instead of renting an apartment.
Property Management Company
Hiring a property management company will help you in at least 3 ways:
1. List your property on the MLS
You can't do this on your own, you need a real estate agent first. It will cost money (usually 50%-75% of the 1st month's rent), but they also show your property to potential tenants, run credit checks, and help you prepare it for showings. You're only other option is to list it in local newspapers or a few online sites and hope that your potential tenants are using those sources.
2. Sign an official lease stating all stipulations of the agreement
It's possible to find a good template online to use, but real estate agents have specific pieces of information that they include in each town for eviction purposes in case something goes wrong. Once your tenant is in place the property management company can charge you about 10% of the monthly rent to handle any phone calls regarding any issues the tenant is having. You can also opt out of that option if you want to collect the entire rental income.
3. Quick and clean eviction
If you end up in court it helps to have a lease created and signed by a 3rd party. Real estate agents also have up-to-date lease agreements that hold up well in court, where your template lease may not. Professionals have been through the process plenty of times and know exactly when to submit each piece of information to the court in order to get the best results.
I have 4 properties and I use a property management company for the 3 that I lease.
The Free Mortgage Calculator offers basic information about your monthly mortgage payment, how to use a mortgage calculator and how to choose the right interest rate that fits your situation. You can also view my real estate investing section for tips about investing in a 2nd home for long-term rental income. I currently own 3 pieces of real estate and plan on keeping them as a retirement fund. My Blog