Mortgage Calculators
The free market economy under which the real estate market functions is ideal for both sellers and buyers of property. If there are few good quality houses on the market then the seller can usually expect a bidding war for their property to develop, pushing up the price. The reverse is also true; in a good housing market the seller maybe forced to lower their asking price to attract buyers.
Whatever the final value of the property buyers will usually have to pay more for the property than they actually have in capital. In this situation the buyer can resort to a number of way to bridge the gap.
If the gap between the amount of capital is small the buyer maybe able to borrow off a relative, or take out a personal loan from a bank or loan company, that is not secured on the property. Another possibility is the seller offering some form of seller financing, to complete the deal.
While the above options are all valid, and occur all the time, the most common way to finance the purchase of a property, when the buyer does not have sufficient capital is by taking out a mortgage.
What Is A Mortgage
A mortgage is a method of financing a real estate deal to bridge the gap between capital and asking price; which is normally large. A mortgage is a contract that you co-sign with a bank or loan company, pledging the property that you are buying to the lender as collateral for the loan debt.
The contract with the bank or loan company means that the bank has a claim on your house or property, until you have paid off your mortgage loan in full, plus the interest incurred over the life of the balance.
If you fail to make the any re-payments then the bank has the right to foreclose on your property and sell the house either at auction, or as an REO (Real Estate Owned property). If you are foreclosed on then you will loose your home and be evicted from the house.
Mortgages vary from bank to bank and loan company to Loan Company, however the typical term is between 15 - 30 years. I.e. the amount is normally paid off in installments, with the person paying off the sum borrowed over either a 15-year or 30-year period.
Applying For A Mortgage
Even though most banks and loan companies lay down similar criteria to decide each person mortgage loan application the final decision as to whether to; offer the home buyer a loan, how much they area allowed to take out, which interest rates and repayment plans to offer, are all the personal preference of the loan company manager or bank manager.
Generally however most banks or loan companies will look at the subsequent criterion when assessing the suitability of a person to take out a mortgage loan, fro the amount that they are seeking:
Individual's (or couple's) gross pre-tax yearly income Individual personal debts of the person applying for a mortgage Relevant credit history Value of the mortgage being asked for, including final amount with interest etc. Personal references from respectable persons
The answers to the above criteria will influence the decision of the bank or loan company to whether or not grant or refuse your mortgage application. However to save you the disappointment of being rejected, especially if you though you would be accepted, you could see if you pre-qualify before going to the bank manager or loan company.
To find out if you pre-qualify for a mortgage you can take advantage of a mortgage calculator. Mortgage calculators can calculate a number of things relating to mortgages. One of the first things that these calculators are useful for is checking if you pre-qualify for a mortgage.
How Does A Mortgage Calculator Work?
In order to use the pre-qualifying part of a mortgage calculator you need to know the following information beforehand, as the pre-qualifying calculator qualifies you on the proposed mortgage by assessing the loan against your personal income.
Gross pre-tax income Total monthly debts The loan amount that you wish to take out The amount of interest on the loan The number of years over which you want to pay off the loan
Note: If one person is signing for the mortgage, even though the mortgage is for a family home, then the sum fro the total gross pre-tax income, savings, and monthly debts should be for all persons in the household.
If you are self employed you will need to average your last two years income and use this value as you gross pre-tax income.
Once you have put the relevant values in all the boxes the calculator will give you a yes/no answer, as to whether you qualify for a mortgage. I.e. do you meet the income requirements and can afford the repayments.
The result of the pre-qualifying test also shows the minimum income you need to successfully qualify for that mortgage, if you were rejected. As a common rule of thumb, however, the proposed housing re-payments for your mortgage should not exceed 29% to 35% of your gross monthly income, and your total long-term debt should not exceed 36% to 41% of your gross monthly income either.
In the case of long-term debt this should include, school loans, car loans, credit card debts, alimony/child support and the housing re-payments.
Once you have determined whether you are likely to be approved for a mortgage the next step would be to see the bank manager or loan company representative. Assuming that you will get a loan is easier if you have checked that you pre-qualify, but again you should not go ahead with any contract signings until the bank or loan company has guaranteed you.
During the interview with the bank or loan company manager the manager will no doubt make every effort to explain the details of the mortgage to you, however when you are discussing the mortgage with the bank or loan manger you should always ask the following questions, or at least be aware of the answers to them, when taking out a mortgage:
What is the value of mortgage in dollars? What are the repayments for the mortgage? How are the repayments paid: each week/month/year? How many repayments will there be? When will the repayments be due? When will the balance of the mortgage be paid off in full? What are the options for repaying the mortgage earlier? What is the interest on the mortgage? What are the consequences of missing a repayment?
It's Not Just The Principle Amount
Knowing the answer to the above questions will help you to evaluate the mortgage on offer and if you can afford to keep up with the payments. You should always remember that the repayment is not limited to paying off the principal amount but also the following items
Principal amount
Interest on the principal amount
Property taxes to the government
Mortgage insurance
The above items are known as PITI (Principal, Interest, Taxes & Insurance) values and combined they make up the repayments that you will pay each month or every two weeks, until your mortgage is paid off in full.
Knowing what the value is for each of these figures will give you an exact value in dollars that indicates what you will pay each month. Knowing this value and keeping track of it is vitally important and can be done with another feature in a mortgage calculator: the PITI calculator.
Using The Calculator
By inputting the following values, regarding your mortgage, into a mortgage PITI calculator you can calculate the amount of PITI you will pay each month; which is also equal to the value of your repayments each month
· Number of years the mortgage is to be paid of in
· Interest rate the mortgage attracts each year
· Principal mortgage amount
· Annual government tax on the mortgage
· Annual home insurance on the mortgage
The calculator will then come back with all the monthly values for
· Homeowners insurance
· Principal & interest
· Property taxes
· Total PITI payment
Example
For example if you take out a mortgage valued at $150,000, with an interest rate of 8% over 25 years the annual taxes and insurance will $1,800 (1.2% of price of home) and $645 (0.43% of price of home) respectively, then you will pay the following in PITI per month
Homeowners insurance = $ 54
+ Principal & interest = $ 1158
+ Property taxes = $ 150
= $ 1362
The PITI calculator is easy to use, saving you the time and effort than producing the calculations by yourself.
A mortgage calculator also has the ability to calculate how much you would need to pay per month if you want to pay off the mortgage earlier.
To determine how long it would take to pay the mortgage off if you increased your payments by a certain amount each month you will need to key in the following values into the mortgage calculator
Additional monthly payment in dollars The percentage increase in monthly payments each year
From these values the time frame for which the payments you typed in will be shown. Remember that the value for principal and interest is not the full repayment value; as they do not include the taxes and insurant you pay each month.
An example calculation is shown bellow:
If you want to pay off a $250,000 loan earlier than the 25 year time period that you originally set, and are willing to pay an extra $250 dollars a month, with an increase of 5% per year in payments, then the following information will need to be put into the calculator
Principal Loan Balance = $250,000 Annual Interest Rate = 9.5 % Amortization Length = 25 years Additional Monthly Prepayment = $250 Increase Monthly Payment each year = 5%
The calculator will calculate that the loan will be paid off in 11.75 years, as opposed to the 25 that was initially set.
