Home Loan Calculator
What is a Home Loan?
A home loan, also known as a mortgage, is a type of loan that can typically be used to either purchase or refinance a house. The loan is backed by the purchased house, meaning the lender can take ownership of the house in the event that the borrower defaults on the loan.
Structure of a Home Loan
A home loan consists of the principal amount or the borrowed amount, the interest rate, and the term or the length of time given to pay off the loan. The most crucial factor determining your monthly payment is the interest rate or APR, and the term.
Calculating Loan Affordability
In addition to the monthly payment amount, the borrower's monthly income is also compared to the amount given up to finance the mortgage, to ascertain whether the given home loan is affordable. The Debt-to-income ratio (DTI) is used for this comparison. A good DTI ratio typically doesn't exceed 28%. (For instance, if your monthly mortgage payment, with taxes and insurance, is $400 a month and you have a monthly income of $1600 before taxes, your DTI is 0.25 or 25%.)
How to Use a Home Loan Calculator
A home loan calculator allows you to estimate your monthly mortgage payments based on the loan amount, the term, and the interest rate. It also displays an amortization schedule which shows how your payments are divided between interest and principal over time.
Inputs
To use a home loan calculator, you have to input the following information:
Home Loan Amount: the principal or the amount you plan to borrow.
Loan Term: the duration over which you will repay the loan amount.
Interest Rate: the annual rate of interest.
Monthly income: your pre-tax income per month, which is required for determining the DTI ratio.
Extra monthly payment (advanced mode): with this option, you can increase the computed monthly payment by a given amount and see its effect on your results.
After setting all specifications, the results appear simultaneously. You can see your DTI ratio, the monthly payment required to pay off the loan in the given loan term, the total payment amount, and the charged interest.
Actual Example to Demonstrate the Calculator
Let's assume that you want to buy a house for $200,000 and need a loan for $130,000 to cover the cost. Your annual interest rate is 5%, and you have chosen a loan term of 15 years (180 months). Your monthly pre-tax income is $4,000.
Using a home loan calculator, you input the following information:
Home loan amount: $130,000
Loan term: 15 years (180 months)
Interest rate: 5%
Monthly income: $4,000
Once the calculator processes this data, it will produce the following results:
DTI ratio: 27%
Monthly payment: $1,080
Total payment amount: $194,400
Charged interest: $64,400
Based on these results, your DTI ratio of 27% does not exceed the recommended 28% rate, indicating that you can safely manage the monthly payments. The total payment amount, including interest, is $194,400.
Keep in mind that the home loan calculator provides an estimation of these values. It serves as an excellent planning tool, but you should consult with a loan officer or financial advisor for a more accurate and personalized assessment.