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Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
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Understanding your mortgage helps you make better financial decisions. Instead of just accepting offers blindly, it’s wise to look at the numbers behind any loan—especially a significant loan such as a home loan.
One useful tool in this process is the mortgage calculator or formula, which helps you understand the potential costs and payments. By using a mortgage calculator (or calculating it by hand), you can gain a clearer picture of what your monthly payments will look like and how much interest you’ll pay over the life of the loan.
People tend to focus on the monthly payment, but there are other important features you can use to analyze your mortgage, such as:
Use the mortgage calculator below to get a sense of what your monthly mortgage payment could end up being,
Start by gathering the information needed to calculate your payments and understand other aspects of the loan. You need the details below. The letter in parentheses tells you where we’ll use these items in calculations (if you choose to calculate this yourself, but you can also use online calculators):
The calculation you use depends on the type of loan you have. Most home loans are standard fixed-rate loans. For example, standard 30-year or 15-year mortgages keep the same interest rate and monthly payment for their duration.
For these fixed loans, use the formula below to calculate the payment. Note that the carat (^) indicates that you’re raising a number to the power indicated after the carat.
Payment = P x (r / n) x (1 + r / n)^n(t)] / (1 + r / n)^n(t) - 1
Suppose you borrow $100,000 at 6% for 30 years, to be repaid monthly. What is the monthly payment? The monthly payment is $599.55.
Plug those numbers into the payment formula:
Your mortgage payment is important, but you also need to know how much of it gets applied to interest each month. A portion of each monthly payment goes toward your interest cost, and the remainder pays down your loan balance. Note that you might also have taxes and insurance included in your monthly payment, but those are separate from your loan calculations.
An amortization table can show you—month-by-month—exactly what happens with each payment. You can create amortization tables by hand, or use a free online calculator and spreadsheet to do the job for you. Take a look at how much total interest you pay over the life of your loan. With that information, you can decide whether you want to save money by:
Shorter-term loans such as 15-year mortgages often have lower rates than 30-year loans. Although you have a bigger monthly payment with a 15-year mortgage, you spend less on interest.
Interest-only loans are much easier to calculate. Unfortunately, you don’t pay down the loan with each required payment, but you can typically pay extra each month if you want to reduce your debt.
Suppose you borrow $100,000 at 6% using an interest-only loan with monthly payments. What is the payment? The payment is $500.
Loan Payment = Amount x (Interest Rate / 12)
Loan payment = $100,000 x (.06 / 12) = $500
Check your math with the interest-only calculator on Google Sheets.
In the example above, the interest-only payment is $500, and it will remain the same until:
Adjustable-rate mortgages (ARMs) feature interest rates that can change, resulting in a new monthly payment. To calculate that payment:
Say you have a hybrid ARM loan balance of $100,000, and there are 10 years left on the loan. Your interest rate is about to adjust to 5%. What will the monthly payment be? The payment will be $1,060.66.
It’s crucial to understand how much of your home you actually own. Of course, you own the home—but until it’s paid off, your lender has a lien on the property, so it’s not yours free-and-clear. The value that you own, known as your "home equity," is the home’s market value minus any outstanding loan balance.
You might want to calculate your equity for several reasons.
Lenders tend to offer you the largest loan that they’ll approve you for by using their standards for an acceptable debt-to-income ratio. However, you don’t need to take the full amount—and it’s often a good idea to borrow less than the maximum available.
Before you apply for loans or visit houses, review your income and your typical monthly expenses to determine how much you’re comfortable spending on a mortgage payment. Once you know that number, you can start talking to lenders and looking at debt-to-income ratios. If you do it the other way around (ignoring your expenses and basing your housing payment solely on your income), you might start shopping for more expensive homes than you can afford, which affects your lifestyle and leaves you vulnerable to surprises.
It’s safest to buy less and enjoy some wiggle room each month. Struggling to keep up with payments is stressful and risky, and it prevents you from saving for other goals.
A fixed-rate mortgage is a home loan that has the same interest rate for the life of the loan. This means your monthly principal and interest payments will stay the same. The proportion of how much of your payment goes toward interest and principal will change each month due to amortization. Each month, a little more of your payment goes toward principal and a little less goes toward interest.
An interest-only mortgage is a home loan that allows you to only pay the interest for the first several years you have the mortgage. After that period, you'll need to pay principal and interest, which means your payments will be significantly higher. You can make principal payments during the interest-only period, but you're not required to.
