Congratulations, you’ve found your dream home! This means it’s time to start the mortgage process. If you feel overwhelmed and confused by all the terms, jargon and numbers, don’t worry because you’re certainly not alone. Getting a mortgage can be a complicated process, made worse by all the unfamiliar terminology your mortgage lender might use. For many it can seem like a foreign language, and home buyers are frequently surprised by the final numbers because they don’t understand the mortgage calculation process.
If mortgage payments only included principal plus interest, it would be considerably easier to predict your payment on a certain home. However, that is rarely the case nowadays, there are usually quite a few other costs built into a monthly mortgage payment. Here we see the five key components that have to be considered:
Principal: Typically, this is the purchase price, minus any down payment. The principal is, quite simply, the amount you borrow. If you’re buying a $250,000 home and put down $50,000, your principal is $200,000.
Interest: Interest is the rate that the lender charges you to loan you the principal. Interest rates are expressed as an annual percentage, so you pay that percentage of the principal in interest each year.
Property taxes: The annual tax assessed by the government on your property, both structure and land.
Mortgage insurance: If your down payment is less than 20% of the home’s purchase price, you’ll probably be required to pay mortgage insurance. This protects the lender’s interest in case a borrower defaults. When the equity in your property increases to 20%, the mortgage insurance is canceled, unless your loan is FHA.
Homeowners association (HOA) fee: This is fee is paid into an organization that assists with upkeep, property improvements and shared amenities.
Frequently, people forget to include all those costs and are in for a nasty shock when their monthly mortgage payment turns out to be a lot more than they anticipated. Having a so called “PITI mortgage calculator” (PITI stands for principal, interest, taxes and insurance) helps to take all these unknowns and what-ifs out of the picture.
Mortgage calculators are not just for figuring out how much your payment will be, having a PITI calculator can help you figure out what you can afford, before you have settled on a home. You can lower potential monthly payments by extending the loan term, or by avoiding mortgage insurance though a larger down payment. You can also use the PITI calculator to see how a change in interest rate can benefit or harm you, and figure out your threshold for what you can afford.
Not all mortgage calculators have these features, those that do really offer prospective buyers a great deal of insight. Setco is proud to announce the launch of our new home mortgage & mortgage refinance calculators, to empower our customers with knowledge and information about their money when they need it most. Click below to learn more and download these these powerful apps, available for both Apple and Android devices.