When using these calculators, please keep in mind that the results of any loan calculator computations are not intended to be, and should not be considered a decision of, or a commitment to the loan type or amount for which you may qualify. These calculations are intended to give you a general idea of which loan type is best for you.
Note: Please review your options with your loan professional to confirm the validity of these projections.
What is a mortgage?
Because mortgages are such large loans, consumers repay them over long periods — usually 15 to 30 years. Monthly payments gradually pay off the principal balance, slowly at first then rapidly toward the end of the loan.
A mortgage is a long-term loan that a borrower obtains from a bank, thrift, independent mortgage broker, online lender or even the property seller.
The house and the land it sits on serve as collateral for the loan. The borrower signs documents at closing that give the lender a lien against that property. A lien gives the lender the power to take the home through foreclosure if the borrower doesn’t make payments as agreed.
What’s in a payment?
When escrow is used, a monthly mortgage payment is called a PITI payment. Because each payment covers a portion of the following four costs:
Principal — the loan balance
Interest — interest owed on that balance
Real Estate Taxes — taxes assessed by different government agencies to pay for school construction, fire department service, etc.
Property Insurance — insurance coverage against fire, theft, hurricanes and other natural disasters
Most lenders require taxes and insurance to be paid out of escrow. Such a policy protects the lender from tax liens and uninsured losses that the borrower can’t repay. The lender may allow a borrower to pay property taxes and insurance in lump sums when they come due.
Depending on the kind of mortgage a borrower has, the monthly payment may include a separate levy for mortgage insurance. The breakdown of each PITI payment changes over time because mortgages are based on a repayment formula called amortization. Amortization means the lender spreads the interest owed on the mortgage over hundreds of payments. This keeps the monthly payments low.
On a 30-year, $150,000 mortgage with a fixed interest rate of 7.5 percent, a homeowner who keeps the loan for the full term will pay $227,575.83 in interest. The lender does not expect that person to pay all that interest in just a couple of years so the interest is spread over the full 30-year term. That keeps the monthly payment at $1,048.82.
The only way to keep the payments stable is to have the majority of each month’s payment go toward interest during the early years of the loan. Of the first month’s payment, for instance, only $111.32 goes toward principal. The other $937.50 goes toward interest. That ratio gradually improves over time, and by the second-to-last payment, $1,035.83 of the borrower’s payment will apply to principal while just $12.99 will go toward interest.
What determines a mortgage payment?
Your monthly principal and interest charges are determined by the rate and the amount of the loan. And the rate and loan amount, in turn, are affected by several factors. The rate depends on your credit score, discount points you pay, and whether the down payment is less than 20 percent. The loan amount depends on the size of the down payment and the home’s price.
There is also the matter of mortgage insurance, which is levied on borrowers who make a down payment of less than 20 percent.