What is a Mortgage?
A mortgage is a legal agreement where a bank or an authorized institution lends money to a borrower in exchange for taking the title of the debtor's property. The bank holds this title until the debtor fully repays the loan. The essential parts of a mortgage involve the loan amount (principal) and the interest, which represents the cost of the loan to the debtor and the remuneration for the bank. In essence, a mortgage is a type of personal loan that the bank provides for purchasing a house, with the real estate serving as collateral.
The most common method for repaying a mortgage loan is to make equal payments consisting of an altering portion of principal and interest over an agreed term. This kind of schedule typically applies to amortized loans in the US and Canada or repayment mortgages in the UK. However, it's essential to know that other types of mortgages might have different repayment structures, such as interest-only, reverse mortgage, or balloon payment mortgages.
How to Use a Mortgage Calculator
To use a mortgage calculator effectively and understand its computational background, it's essential to become familiar with the following terms:
Loan amount (principal): The amount you want to borrow from the bank, which depends on the home value (the price of the property) and the down payment.
Down payment: The amount of money you can use to pay for the property before obtaining the loan. The required minimum amount varies depending on the institution and the country's legislation.
Annual Interest Rate: The advertised annual rate of interest that is one of the most critical factors to consider when choosing a mortgage.
Loan term: The interval within which you must repay the borrowed money and fulfill the conditions set out by the contract. Loan terms vary depending on the bank and mortgage type.
Interest compounding: The interval at which your lender applies the annual rate of interest to the principal's balance.
When using a mortgage calculator, you will need to input the essential information including the loan amount, down payment, annual interest rate, loan term, and interest compounding. After entering the data, you may adjust the variables to see how different factors and components affect your loan and evaluate different repayment scenarios.
An Actual Example to Demonstrate the Calculator
Let's consider an example to demonstrate how the mortgage calculator works. Suppose you want to buy a house that costs $300,000 and you have saved up a down payment of $60,000.
Loan amount (principal): $240,000 ($300,000 - $60,000)
Down payment: $60,000
Annual Interest Rate: 3.5%
Loan term: 30 years
Interest compounding: Monthly
Input these values into the calculator, and it will provide you with the following information:
Monthly mortgage payment: $1,078.29
Total interest paid over 30 years: $148,183.22
Total amount paid over the loan term: $388,183.22
By analyzing this result, you can decide whether this mortgage fits your budget or if you need to consider other options like increasing your down payment, finding a lower interest rate, or adjusting the loan term. You can also experiment with the calculator to model different repayment scenarios and gauge the impact of each variable on your mortgage.