Using a mortgage calculator can help you well before you start heading out to look at properties in person. Although budgeting, establishing affordability, and figuring out the impact of interest rates isn’t necessarily the most fun part of the process, it’s arguably the most important. If you want to keep from overextending yourself
on your mortgage – and we know you do – you’re going to need to do some important calculations first. And for these, online mortgage calculators are your best friends.
Online mortgage calculators are automated tools that help you determine information about a mortgage depending on a number of variables, including the length of time it will take to pay off the mortgage and interest (known as the amortization period of the loan), the amount of the mortgage itself, the interest rate, and the frequency of payments. Because it’s automated, all you have to do is fill in the required fields and the calculator will generate the specified result. But what kind of information do you need, and what mortgage calculator should you use?
Types of calculators
The mortgage affordability calculator
is a good place to start. It asks for quite a bit of information: your annual pre-tax income (and that of your co-applicant, if necessary), your monthly living costs, your current debts, and type of home that you’d like to buy; information pertaining to your prospective mortgage, including the mortgage amount, interest rate, amortization period; and of your personal buying profile, including where you live and what kind of home you’d like to buy. Once you hit ‘calculate’, the mortgage affordability calculator will generate an approximate amount that a lender will loan you for your mortgage, keeping in mind the standard debt ratios adhered to by most regulated lenders.
Once you know the approximant amount of your mortgage, you can figure out your mortgage payments using a mortgage payment calculator
. This one requires less information than the affordability calculator. You input the loan amount, an interest rate, and an amortization period, and the calculator will give you your estimated mortgage payment. What’s great about the mortgage calculator is that it doesn’t just show you monthly payment amounts; it will also show you what those payments would be if you choose to make mortgage payments on a weekly or bi-weekly basis. There’s also an option for ‘half-monthly paid fortnightly’, which means that the annual repayments are divided by 12, then divided by two, one for each two-week period in a month. You can then see the differences that each of those payment options make when it comes to the amount of interest you’ll pay over the life of your loan.
Let’s not forget the other particulars that are included in your mortgage besides the amount of the mortgage itself and the size of the mortgage payments relative to the payment frequency. If you’re coming to the table with less than 20 per cent of the purchase price of the property as a down payment, then your lender is going to require you to get mortgage default insurance (as long as your home is under $1 million). For some buyers, the cost of mortgage insurance can be the difference between buying a home now and waiting to save more cash for a down payment. If this is the case, you can use a mortgage insurance calculator
and figure out where that line is for you. This calculator takes the cost of the home, the amortization period, and your down payment, and will tell you how much you will pay for mortgage insurance you’ll need, as well as the total amount of your mortgage once the insurance premium is included.
If you already have a home and are considering other options, the refinancing calculator will be able to tell you not only how much money you’ll save over the life of your mortgage if you refinance at a different interest rate, but also how long you’ll have to stay in your home in order to see the savings benefits. These calculations can be key when it comes to debating whether to refinance in the middle of a mortgage term or to wait until it’s time to renew your mortgage.
When to use mortgage calculators
You don’t have to use all of the mortgage calculators at the same time. Some, such as the mortgage affordability calculator, are better before you start the process. Doing some general math before you start contacting mortgage brokers and/or lenders can give you the confidence to know exactly what you're getting into before you commit yourself to getting a bigger mortgage than what your income and debts can support.
Let’s say that a mortgage affordability calculator shows that you'll be approved for a mortgage of $350,000. If the home prices of your desired type of home in your target area are upwards of $500,000, however, then you know that there’s a disconnect between what you want and what you can afford. In this case, you'll need to either adjust the kind of home you're looking for, change the target area where you’re looking for a home, wait a while longer and save more money before you buy a home, or start exploring some alternative options, such as getting help to amass a bigger down payment or go in on the home purchase with another party, such as a family member.
Using mortgage calculators can also help you see, in real terms, how different mortgage scenarios play out in the long term. Having a 10-year amortization period as opposed to a 25-year amortization period makes a big difference in terms of how much you’ll pay for the mortgage overall. But maybe the difference between a 2.99 per cent interest rate and a 3.2 per cent interest rate aren’t as big as you thought.
For some of the calculators, the results, while accurate in the calculations themselves, will change when you actually apply for the mortgage. This is because there are factors that these calculators don’t include, such as your credit history. Even without that information, mortgage calculators are a great planning tool that you can use to begin to prepare yourself for the journey ahead. If you’ve already gotten a mortgage preapproval
, mortgage calculators will end up being particularly useful – and accurate – since you can type in the exact interest rate down to a couple of decimal points, instead of rounding up or down or guessing.
If you haven’t gotten a preapproval yet, then you’ll need to keep in mind that just because you qualify for a particular amount, or you got a particular amount from the mortgage affordability calculator, doesn’t automatically mean that you can afford that mortgage amount. Before applying for a mortgage, it’s a good idea to have done the legwork of keeping track of your discretionary income, which isn't factored into the calculations done by either lender or mortgage calculators. If there is no wiggle room left in your budget for unforeseen housing-related costs, maybe you should think about postponing your home purchase.
Some first-time home buyers will fall in love with a house that they find and then try to get a mortgage afterward, which can only lead to disappointment when they discover that they can’t get approved for the mortgage that they need in order to get into that home. Other buyers will see that they can afford the mortgage payments based on the mortgage amount and down payments, but realize too late that other factors come into play that effectively determine how well they’re able to handle the mortgage burden. Having closely examined your budget beforehand and used mortgage calculators effectively along the way can help you avoid either of these outcomes.
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