You want to buy your first house or maybe considering to shift to a new one. Going for a mortgage seems an obvious option but you should contemplate a lot of variables that will play part in mortgage calculations and know if you can afford it or not, or what steps you can follow for a smooth transaction.
What to Choose?
When it comes to mortgage, there are a lot of players in the market. There are five main types of mortgages, but Fixed-rate mortgages (30 years or 15 years) and Adjustable rate mortgages or ARM (5 years) are the most common. In fixed-rate, the payment is pre-determined while in adjustable-rate it fluctuates yearly according to the market.
Recent analysis has shown a constant fall in the mortgage interests, with the 10 year average of a 30-year fixed rate is 4.37% and a 15-year fixed-rate is 3.68, which has gone further down in the year 2020, to be 2.81% and 2.32%, respectively.
ARM rates, though low, are a different story. They averaged 3.23% to 2.88%. As the real estate market is at its record low-interest rates, it is likely to take a boom which will increase the interest rate compared to fixed rates. So, choose mortgage wisely after doing your homework.
To calculate mortgage manually, to see all the variables play, you will need to know a few things beforehand.
Principal Mortgage Amount
Let’s start with the elephant in the room. The principal mortgage amount is the original loan amount that you take from the lender minus the down payment. With each new monthly installment, the principal amount decreases, but the interest rate increases.
Down Payment
It is the upfront payment, which is required to purchase and close the house deal. They vary between 3.5% to 20%. Various other factors such as the lifetime payment of the mortgage, home price, monthly installments, and insurance are determined based on the down payment. For example, if you have a mortgage amounting to 100,000 USD, a 20% down payment will be of 20,000 dollars.
Annual Interest Rate
It is an account of the charges that the lender, usually a bank, makes on behalf of loaning you money. ARP (Annual interest rate percentage) covers the interest and any other charges you will need to pay. This is usually provided by the bank, but you can count by multiplying interest rates to the accounted intervals in a year.
You are more likely to get a mortgage at a low-interest rate if you have a credit score of 670 or above, which is considered good. Credit score entails payment history, loans, credit history, and more. You can figure in the monthly variable of interest by dividing the annual interest rate by 12.
Loan Term
The loan term is the 30 years or 15 years fixed-rate mortgage. This includes monthly payments which you can calculate by multiplying 30 into 12 (months of a year) and 15 into 12. It is common knowledge that short term plan, such as 15 years or 5 years in the case of ARM, call for higher installment payments. There are 360 monthly installments in 30 years fixed mortgage, 180 in 15 years fixed mortgage, and 60 monthly installments in 5 years adjustable-rate mortgage.
The factors mentioned above are the main parts of determining the mortgage, but other variables affect the cost of the mortgage. You should consider these keenly, because they may make or break your deal.
Homeowner’s Insurance
This is the insurance of your residential property, which is commonly termed as HOI. It covers various losses and provides a financial sheath against any big damage. All insurances cover the basic structure, dwelling, fixtures, and other liabilities. There are 8 types of home insurance, in which HO-3 is the most common, which made up 79.12% of policies in 2017.
Besides, the HOI, you should also add in the homeowner’s association fee (HOA fee) which is collected for the maintenance of the property in an area. These amounts are usually fixed and are calculated in the monthly mortgage.
Private Mortgage Insurance
Private mortgage insurance is required when you have a conventional loan, which is apart from any government insurance program and your down payment is less than 20%. It indicates high-risk lending and the interest rates are usually high. Once the 20% down payment bar is crossed, the high-interest, PMI is waived off for more affordable plans. Consider PMI, if you have 10 to 15% for down payments.
Property Taxes
This is an annual expenditure that is collected to be paid to the government, usually the local governing body. Tax rates may differ from 1-4% based on the home price and the locality. The value of the property plays a crucial role in how much tax is to be paid.
The value is the tax is determined by a taxing authority. The bank collects the property tax and puts it in escrow until the mortgage is paid. Property tax rates are determined by the local governments of different states. For example, the tax rate for Los Angles is done by a country auditory.
Mortgage Calculations: How to Calculate Mortgage on Your Own
The formula for Mortgage Calculation
- The formulas vary slightly for fixed-rate mortgages and adjustable-rate mortgages. Here, fixed-rate mortgage formula for a 30-year or a 15-year mortgage is provided:
- Principal amount = P
- Interest rate = r
- Loan term = t
- Payment per year = n
- Monthly Payment = P x (r / n) x (1 + r / n)^n(t)] / (1 + r / n)^n(t) – 1
- (where ^ indicates the exponent)
Once you have calculated the primary mortgage, add in the fixed values of HOI premium and property tax in it as well, to obtain the monthly amount you are going to pay. Check your primary mortgage calculation online to eliminate any mistake.
In a nutshell, paying your mortgage earlier on in the term and choosing an affordable plan will save you money and get you the well-coveted house for good.