How Our Mortgage Calculator Works
Buying a house is likely the largest financial decision you will ever make. Our free Mortgage Calculator helps you estimate your monthly payments and see exactly how much interest you will pay over the life of your loan.
The standard formula used by banks to calculate a fixed-rate mortgage is complex. It ensures that your monthly payment remains exactly the same for the entire duration of the loan, while the ratio of principal to interest shifts over time (a process known as amortization).
Understanding the Key Terms
- Home Price: The total agreed-upon purchase price of the property.
- Down Payment: The upfront cash you pay towards the home. Subtracting this from the Home Price gives you your actual Principal Loan Amount. A 20% down payment is often recommended to avoid paying Private Mortgage Insurance (PMI).
- Loan Term: How long you have to pay back the loan. The most common terms in the United States are 15-year and 30-year fixed-rate mortgages.
- Interest Rate: The annual percentage rate charged by the lender for borrowing the money. Even a 0.5% difference in your interest rate can save or cost you tens of thousands of dollars over 30 years.
The Amortization Process
When you make your first few mortgage payments, you might be surprised to see that your loan balance barely drops. This is because of amortization. In the early years of a 30-year mortgage, the vast majority of your monthly payment goes toward paying off interest. As the years go by and the principal shrinks, a larger percentage of your payment begins to attack the principal directly.
Frequently Asked Questions (FAQ)
1. Does this calculator include taxes and insurance?
No. This calculator provides your pure "P&I" (Principal and Interest) payment. Most homeowners will also have to pay property taxes and homeowner's insurance, which are typically bundled into your monthly bill and held in an escrow account. You should budget an additional several hundred dollars a month for these expenses.
2. Should I choose a 15-year or 30-year mortgage?
A 30-year mortgage gives you a much lower and more manageable monthly payment, which is why it is the most popular choice. A 15-year mortgage will have a higher monthly payment, but you will pay significantly less total interest over the life of the loan and own your home free-and-clear twice as fast.
3. What happens if I pay extra every month?
Because your interest is calculated based on your remaining principal balance, making extra payments directed specifically at the principal can drastically reduce the amount of total interest you pay and shorten the life of your loan by years. Even adding $100 extra a month makes a massive mathematical difference!