How To Use A Mortgage Calculator
Mortgage calculators are essential for those in the market to purchase a new home, Rocket Mortgage says, as they will help you determine the financial viability of any property you may be considering. These tools will also move the needle on your inevitable ownership of your own property.
The most important feature of a mortgage calculator is the embedded research that is incorporated into the exercise. To use this tool, you need to do some financial math that is often overlooked in daily budgeting and routine consumer spending. Simply put, a mortgage calculator is one of the most important tools that you can use when approaching the real estate market.
Playing with the figures will assist you in making an intelligent decision when it comes to selecting favorable loan terms and dialing in the correct amount to borrow while retaining financial stability when the monthly payments begin to come due.
Down payments can vary
One of the first and most important features of any lending opportunity that you'll need to consider is the down payment figure. Lenders may require various payment contributions when extending a loan offer to you as a borrower, and a traditional rule of thumb is the 20% mark. However, knowing that a 20% down payment has become somewhat antiquated is essential. Investopedia reports that the median figure rests at 12%, and American Family Insurance cites 6% as the modern average expected from home buyers in the current market.
Saving for a down payment is crucial, and many people spend many months or even years putting aside cash for this important purchase. The less you require upfront, the more affordable moving into your own home may seem — and you'll certainly accomplish this transition faster with a smaller down payment. However, the less you spend on the purchase initially, the more you'll have to pay back, with the addition of interest.
A mortgage calculator can help balance these figures for you, making calculations that will provide clarity when it comes to targeting the down payment figure that works best for your budget, needs, and financial circumstances.
The interest rate and loan term will dictate the overall cost
When calculating the amount you'll owe on the loan, the two most important numbers are the loan term or length of repayment and the interest rate assigned to your borrowing agreement. Bankrate notes that the national average is 5.46% on 30-year, fixed-rate mortgages and 4.69% on 15-year, fixed-rate loans.
The combination of interest and time will give you the variables necessary to calculate the total cost of the loan, and when combined with the amount needed will illuminate the overall monthly payments that you can expect to see for the duration of your mortgage.
Calculators are powerful tools in this regard because they help you understand in clear-cut figures what you can expect for the coming years. What a calculator doesn't tell you, though, is that variables can be subject to change. For example, Rocket Mortgage notes that a home price and listing price aren't necessarily the same. The list price is how much a seller is looking to move the property for but is not a definitive guide for what they will actually receive from the sale. Working to negotiate a better price will reduce the monthly payments by minimizing the initial loan figure you need and receive from the bank.
Your debt-to-income ratio can help determine monthly costs
Your debt-to-income (DTI) ratio can help you understand the fiscal viability of a mortgage repayment figure that comes out as the product of a mortgage loan calculation. This figure signals to a lender how healthy your overall financials are by calculating the amount of your gross income that is already tied into financial obligations like a car loan, student debt, or credit card repayments.
Calculating your debt-to-income ratio is the final step in using a mortgage calculator because it puts the monthly repayment figure into perspective. As a rule of thumb, the Consumer Financial Protection Bureau reports that a 43% rate or better should be your goal when seeking new funding for a major purchase (like a new home). A DTI number lower than this threshold will typically open the door to a qualified mortgage, which can help reduce your overall repayment figure by lowering the interest rate.
Lending is a numbers game, and with the help of a mortgage calculator, you can get a firsthand look at how you and your finances stack up to fully understand your fiscal stability and overall wellness.