What is a Mortgage Calculator?
A mortgage calculator is a special tool designed to help borrowers calculate the cost of a mortgage loan and mortgage payments and analyze loan alternatives.
The shortcoming of most mortgage calculators is that they do not allow you to include your fixed costs in addition to the monthly mortgage payment. Such factors may be a burden and affect your ability to service the loan: utilities like gas, electricity, internet, gas for your car, etc. These factors may seem to have nothing to do with the mortgage, purchase price, and monthly mortgage payments, but they play a significant role in the long run.
The affordability of a mortgage loan depends on your monthly income and its stability, amortization period, purchase price, mortgage payment amount, mortgage principal, payment frequency, mortgage default insurance, and the expenses that constantly fall off your financial pie. Some costs that are not constant can be reduced, but others must be accounted for so that you always have enough cash reserves to cover them.
With a mortgage calculator, you can quickly calculate a possible mortgage amount and prepare before you go to the lender and apply for a mortgage loan. It increases your chances of paying off your mortgage successfully. Some calculators have an introductory section and an additional optional section where you can enter your credit score, monthly property tax amount, monthly payment for homeowner's insurance, mortgage insurance, etc. The more details a mortgage calculator takes into account, the more accurate results you will get. Some calculators give you the option to display the results in a graph with a percentage breakdown of the cost of the loan. To be precise with data, you can check some figures with the Canada life assurance company.
Why do you need a mortgage calculator?
A mortgage home must be not only beautiful but also affordable for you because until the mortgage amount is fully repaid, this property is not entirely yours. You cannot dispose of it freely, and if you get into trouble and can no longer make your monthly mortgage payment, it will eventually be repossessed. The mortgage payment calculator is designed for your convenience. You do not have to use formulas and calculate at your leisure. Instead, it is all done automatically because the calculator knows the formulas.
A mortgage payment calculator can help you check what amount would be added to your permanent monthly expenses and see if the amount is acceptable for you. Thus, you can determine the appropriate loan term because shorter mortgage loans have lower interest rates but higher monthly payments, which could stress your budget.
On the other hand, long mortgage loans have lower monthly mortgage payments with the same mortgage principal, but it is a significant overpayment in the long run. Another issue a mortgage payment calculator can help you understand is the amount of your down payment. You can quickly calculate different options and see what works best for you. For example, sometimes, you decide to make a smaller down payment and use some of your savings for investments. This is a viable option if you know there's a good chance you will not overpay for additional mortgage insurance because of the smaller down payment.
Suppose you are considering different locations, such as rural or urban. In that case, you will need to evaluate which option is better from a financial perspective, property taxes, and what mortgage amount works best for you. Even before you pay off your mortgage, it is better to live in a home that you like and can afford at the same time.
How does a mortgage calculator work?
A mortgage calculator converts your input data into the ability to estimate mortgage payments, mortgage terms, and monthly housing costs. It allows you to control your finances and not overestimate your current possibilities even before contacting a mortgage expert. A mortgage calculator can convert your inputs into monthly payments using a specific formula. A calculator will do the complicated calculations and give you an idea of interest payments and extra monthly payments allowing you to save money.
To estimate how much you can pay monthly for your mortgage and make the right financial decision, you need to choose the right calculator. Otherwise, you may be "surprised" later that your monthly expenses for a new home are higher than you could have expected and very much different from the calculator results. Make sure the calculation includes property taxes, homeowner's insurance, insurance for critical illness (ensure you get quotes for your area, it does not take much time), utilities, and condo fees; such additional payments are significant. Including other costs is also relevant because your first month comprises much more than just interest and principal. The lender's fee, third-parties closing costs for residential properties, and HOA fees might be high enough that you should include them in your calculation.
Option 1. Calculation based on the property value
To perform this operation, you will need a simple mortgage calculator that takes into account the loan amount, the term, and the repayment method. You may also be asked to specify the mortgage type or the interest rate if there are several mortgage options and only one calculating tool available on the page. Details necessary for the calculation:
- The cost of the property. This field suggests you enter the property price you plan to purchase. Remember that you will be required to make a down payment of at least 5% of the property's price.
- The down payment. It is the initial up-front partial payment you have to make at the time of finalizing the transaction;
- The loan term. The mortgage term is the time your mortgage contract is in effect, while amortization is the time it will take you to pay your mortgage in full. For residential mortgages, the maximum amortization period in Canada is 35 years.
- The interest rate. Our calculator takes into account the region's peculiarities. By default, the calculator has the average interest rate for the region where you calculate. In addition, minimum and maximum values for the country are embedded. You will see a notification if you input a value that does not correspond to the country.
- Payment type. The calculator features the possibility to specify the mortgage type: annuity or linear. Annuity payments are certainly convenient for both the borrower and the lender. Still, the client will expect a more significant overpayment due to a slower principal repayment.
Option 2. Calculation based on the loan amount
Mortgage calculators suitable for such operations feature the early repayment calculation option. The difference between this tool and the simple one is that it is possible to evaluate the mortgage details at once and see the change in the debt amount if early repayment occurs, which may be convenient when you intend to reduce the overpayment. Details necessary for the calculation:
- The loan amount. This is the money you receive from the lender to purchase real estate (without taking into account the down payment). You might consider reviewing the maximum mortgage amounts granted by Canadian lenders at this point.
- The loan term. The mortgage term is the time your mortgage contract is in effect, while amortization is the time it will take you to pay your mortgage in full. For residential mortgages, the maximum amortization period in Canada is 35 years.
- The interest rate. Our calculator considers the region's peculiarities. By default, the calculator has the average interest rate for the area where you calculate. In addition, minimum and maximum values for the country are embedded. You will see a corresponding notification if you input a value that does not correspond to the country.
- Early repayment. This field allows you to choose the type of early repayment (partial or full). Select the repayment date and the amount you are going to pay.
Option 3. Calculation based on the total cost to purchasing of a property
A mortgage calculator featuring more details is necessary to calculate the total cost of acquiring a property. This calculator differs from the previous tools in that it considers the tax burden, default insurance, and additional expenses, for example, an origination or a brokerage fee. In addition, it allows for more accurate calculations. Details necessary for the calculation:
- The cost of the property. In this field, enter the cost of the property you are planning to purchase. Remember that you will be required to make a down payment of at least 5% of the property's price.
- The down payment. It is the initial up-front partial payment you have to make when at the time of finalizing the transaction;
- The loan term. The mortgage term is the time your mortgage contract is in effect, while amortization is the time it will take you to pay your mortgage in full. For residential mortgages, the maximum amortization period in Canada is 35 years.
- The interest rate. Our calculator takes into account the region's peculiarities. By default, the calculator has the average interest rate for the region where you calculate. In addition, minimum and maximum values for the country are embedded. You will see a corresponding notification if you input a value that does not correspond to the country.
- Additional data.
Factors that determine your mortgage interest rate
The mortgage interest rate is essential in deciding which lender to apply for a loan with. The rate depends on several factors that are internal (dependent on you) and external (market and economic conditions). Let us start with the internal aspects:
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Your credit score. The higher it is, the higher the chances that you will be able to repay a loan without any problems. Thus, the credit score is essential when you apply for a loan because it says something about your creditworthiness. For example, the credit score is influenced by the borrower's payment history, the amount of credit used, the type of credit, the number of recent credit applications, etc.
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The oan-to-value (LTV) is a ratio calculated by dividing the loan amount by the property's value and expressed as a percentage. The lower the LTV, the better for the lender because in the event of foreclosure of the borrower's property, the proceeds from the sale would be sufficient to pay the outstanding principal and interest payments and cover other costs incurred by the bank in connection with the foreclosure process. Typically, the loan-to-value ratio should not be less than 80%, or additional mortgage insurance will be required. The loan-to-value ratio and other terms are included in the description of the loan product, and you can request this information from the lender;
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The lender examines the debt-to-income ratio because it is one of the indicators of your risk profile, knowing how your gross income is distributed, which shows your liquidity situation. It provides information about your risk of default. Fixed expenses and their share in the borrower's income are analyzed;
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Value of the real estate object;
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Loan amount;
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HOA fees;
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Location of the home (province, rural or urban area, etc.);
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Mortgage life insurance;
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Use the property - whether it is a first, second, or vacation home, etc. In general, if it is your first home, it is assumed that you will make more significant efforts to repay the loan even if you run into financial difficulties;
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Down payment of your contribution into the purchase price of the property - in some cases, it is below a particular benchmark, so mortgage insurance must be purchased. If the lender pays the mortgage insurance, this will result in a higher interest rate. As a rule, the higher the personal contribution, the lower the interest rate on a mortgage loan.
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Loan term -a shorter loan term usually means a lower interest rate on a mortgage loan, but the monthly payments are higher.
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Type of interest rate - in addition to being a regular compounded interest rate, it can also be a fixed-rate mortgage or variable rate. An initial variable rate may be more attractive than a fixed mortgage rate, but it can change dramatically over time and increase your loan burden.
Several factors influence the market:
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The demand for mortgage bonds (when demand in this market is good, mortgage rates decrease);
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When the bond market falls, and the stock market grows instead, investors tend to adopt a riskier strategy believing in good growth trends, and mortgage rates rise;
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When inflation increases, government institutions take measures to reduce the leverage of interest rates to stimulate the labor market and balance the economic situation;
How to calculate mortgage payments
As always, you have several options and can decide which one is better for you. For example, if you are good at math, you can try arithmetic. But you have to be prepared that even a single calculation error can lead to an utterly misleading result.
The second option is to use a calculator to do the calculations for you. Alternatively, both methods can be combined. For example, you can manually calculate and then use the mortgage calculator to check yourself. But this verification may not work 100% because you cannot see the formula the online calculator uses behind its handy interface.
Manually
First, you can do the calculation manually. You need to solve the equation with many factors and see how the factors affect your borrowing costs. For example, you can use the following equation:
M=P[i(1+i)^n]/[(1+ i)^n-1]
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M is your monthly payment;
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P denotes total loan amount (principal);
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I stands for interest rate, monthly percentage (you must divide the annual interest rate by 12 to get this number);
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N denotes the total term of your mortgage loan in months.
Anyway, you will need a calculator to calculate the exponents and do the simple math inside the brackets.
It should be mentioned that your actual mortgage payment may involve a much more complicated calculation since a mortgage usually involves more variables:
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down payment;
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type of interest.
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mortgage insurance, etc.
You can ask the lender for the full list of influencing factors and get them by carefully reading the loan product description.
Using a calculator
If you do not feel like calculating long equations to figure out your monthly payment and get your preliminary payment schedule, you can always use a free online tool called a mortgage calculator.
There are numerous free loan calculators on the internet. If you want to use an independent loan calculator that is not on your lender's website, it may be pretty simple and not consider all the necessary factors. There may not be fields to enter all the data you need for your mortgage loan. Therefore, carefully check which fields are available. If you use the mortgage calculator on the lender's website, you are much more likely to get a more accurate result.
Note: Even good loan calculators, including the one on the lender's website, will always state that the results are approximate and that the exact figures you will receive from the lender and the correct repayment schedule are part of your loan agreement.
How to compare loans using a mortgage calculator
It depends on the calculator you use. Some allow you to do one calculation after another. Other calculators are advanced enough to do some calculations to illustrate the cost comparison. These may be different mortgage products from the same lender or offers from different lenders.
Mortgages are a multi-factorial affair; even with a simple calculator, you can play around with loan amount, term, down payment amount, etc.
If you get the data on different mortgage options, you can make a spreadsheet and see what is affordable for you and does not overwhelm you because a mortgage is a marathon with high costs. The mistake of taking out an unaffordable loan can leave you without a home.
To make a good decision, consider several options and lenders and choose the one that is good for you.
