How to Calculate a Mortgage

If you're considering getting a new mortgage or refinancing your existing mortgage, you may find yourself confused as to how a mortgage loan is actually figured. Many people don't understand the process of amortizing a loan and find that it's somewhat out of their mathematical abilities. Of course, you can always use an amortization table to easily calculate a mortgage, but if you want to figure some numbers out quickly, here are some simple steps you can remember to make sure you're reaching the right figure.

The first step to calculate a mortgage is of course to figure out the purchase price of the home. To make things simple, we'll use a flat $100,000 as the purchase price. You then need to know the loan's interest rate in order to calculate a mortgage, and this is where it gets a little tricky. Many people think that the annual percentage rate is the same as their interest rate, but usually the annual percentage rate has some additional fees or charges added to it in order to figure the actual percentage rate. Make sure you understand this; if you have any questions about the two, ask your bank or lender. But when you're ready to calculate a mortgage, be sure you're using the correct interest rate amount.

Some things will affect the amount of your actual loan, including the points you pay at closing. Points are a percent of the original loan that you pay up front as fees to your lender. Sometimes a lender will negotiate a lower interest rate in exchange for more points. When you calculate a mortgage, be sure that you've understood this option. Additional points may cost you a few extra thousand at closing but save you thousands over the life of your mortgage loan. When talking with your lender or bank, ask about the points they offer and how that affects your interest rate. If possible, run a few different scenarios through an amortization table to calculate a mortgage with more points up front to see how much you would save in the long run. It's usually worth it to pay more points, and you might want to avoid those "no point" options for some mortgages. The more you finance, the more you're going to pay in interest over the next 30 years, so be sure of the decision you make.

The next step is to add the amount for property taxes, homeowner's insurance, and private mortgage insurance if you need to. Many companies will tell you the amount of these additional charges; usually they're a set percent of the mortgage itself. You need to remember these charges when you calculate a mortgage as they could raise your monthly payment by a few hundred dollars, and you don't want to be caught unawares.

If you remember to add all these different elements into your figuring when you calculate a mortgage, you'll be able to figure out your best options for a loan and make the best financial decisions.