Many people are taking advantage of low mortgage interest rates and favorable loan terms to buy a new home or refinance an existing one. One of the most important factors in a new home purchase, however, is figuring out how much home you can actually afford. A mortgage loan payoff calculator can help.
You may be wondering why we’re recommending a mortgage loan payoff calculator if you haven’t even bought a home yet. But it’s a great tool to use even before you make an offer on a home. It will help you determine what your budget is for your new home purchase and what loan terms are the best for your particular situation.
Here’s how to use a mortgage loan calculator to make sure you don’t break the bank when it comes to your monthly mortgage payment.
Get a Pre-Approval Letter
Before you even look at homes, you should figure out what purchase price is within your budget. The last thing you want is to find your dream home only to realize you can’t afford it. So the first step is to determine your budget for the overall purchase price of the home.
If you need to secure financing for your home purchase, you’ll want to go to a lender to ask for a pre-approval letter. Using information you provide about your income and assets, your lender will provide a pre-approval letter showing the maximum amount you’re approved to borrow. This letter is helpful not only for planning a budget, but also so you’ll be taken more seriously by sellers when it comes time to make an offer.
Keep in mind that you may not necessarily want to borrow the full amount listed on the pre-approval letter. Simply because you are approved for a certain amount doesn’t mean it’s an amount you can comfortably afford to spend.
This is where the mortgage loan calculator comes in. For instance, if you’re approved by the bank for a financing amount of $400,000, you can plug that number into the mortgage loan payoff calculator. But to get the most accurate monthly payment possible, you’ll want to gather some other information first. That leads us to our next step.
Figure Out How Much You Have for a Down Payment
Depending on loan type and the property you buy, you will likely need to pay a deposit on your home purchase. The deposit—or down payment—is a percentage of the home’s purchase price. If you purchase a condo, for instance, you may be required to pay a deposit of as much as 20 to 25% of the home purchase price.
On the other hand, if you qualify for a Federal Housing Administration (FHA) mortgage, you may be able to pay a deposit of as little as 3.5%.
Keep in mind that if you pay a deposit of less than 20% of the home purchase price, you will likely have to pay private mortgage insurance. PMI protects the lender’s investment in the event of home devaluation and will be added to your mortgage payment until you have paid a certain percentage of the home’s value (typically 20% of the original purchase price or appraisal amount).
So decide how much you can put toward the down payment. If it’s less than 20%, ask your lender how much PMI you will be expected to pay. Jot that number down so you can add it to your monthly mortgage amount.
Determine Your Interest Rate
Your interest rate on your mortgage is determined by your creditworthiness. The pre-approval letter you acquire from your lender will reflect your interest rate. That interest rate is typically guaranteed for 60 to 90 days from the date of the letter.
If you don’t know your interest rate just yet, that’s okay. Most mortgage loan payoff calculators have a sample interest rate. Just keep in mind that if you’re going to use this interest rate, your monthly mortgage payment may change based on your actual interest rate at the time you close on your loan.
Choose a Loan Type
The next thing you want to do is figure out what type of loan you want. Loan type has a major impact on your monthly mortgage payment. If you have a fixed mortgage, that means you pay a fixed interest rate over the life of the loan. An adjustable-rate mortgage, on the other hand, means your interest rate will fluctuate based on market conditions. While it can be a little more difficult to determine a monthly mortgage payment for an adjustable-rate mortgage, this adjustable-rate mortgage analyzer can help.
The next thing you need to decide is the loan term you want. This is the length of time you will have to pay the loan back. The most common mortgage terms are 15 and 30 years. If you choose a shorter loan term, your monthly mortgage payment will be higher. However, you will save more money on interest over the life of the loan. On the other hand, if you choose a 30-year mortgage, your monthly mortgage payment will be lower, but you’ll pay more money in interest over the loan term.
Crunch the Numbers
Now that you know your pre-approval amount, interest rate, and the type of loan you would like, you’re almost ready to crunch the numbers. There are a couple of other numbers that will be helpful to have on hand. For instance, if you’re purchasing a condo, what’s the monthly HOA fee you have to pay? Also, how much will you have to pay in property taxes and home insurance each year? These numbers are helpful for calculating exactly how much you will be paying each month in homeownership costs.
Once you have the numbers, it’s time to plug them into the mortgage loan payoff calculator. This will give you an approximate monthly mortgage payment amount. If the amount is more than you can afford, you may need to adjust your search and look for homes that have a lower listing price. On the other hand, if the amount is less than what you can afford, you may be able to broaden your search.
But remember, you should be comfortable with your monthly mortgage payment. Don’t stretch yourself too thin. Instead, give yourself some room to work with and be sure to account for any other homeowner expenses you’re likely to have.
If you would like to explore whether homeownership is right for you or learn more about mortgage loan payoff calculators, visit us at Central Willamette Credit Union. We have several locations in the Willamette Valley and would be happy to help you on your path to homeownership.