How to Calculate Different Types of Mortgages
Mortgages generally fall into two categories. Calculating mortgage costs can be calculated in different ways. The home buyer can employ a fixed-rate mortgage making the same interest and principal payments for the life of the mortgage, or the buyer can choose an adjustable rate mortgage with varying payments. Within these categories there are other factors such as prepayments, points and length of the mortgage that make the mortgage rate calculation a complicated process.
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Instructions
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Use resources (below) to find a fixed rate mortgage calculator. Fixed rate mortgage calculators will compute all interest and principal payments for the life of the mortgage. Note that if you purchased a mortgage at a rate with points you add the value of the points from the mortgage amount. Thus, a $75,000 mortgage amount with two points is a total of $75,000 plus (2 percent of $75,000 or $1500) for a total of $76,500.
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Enter the mortgage rate or interest rate, the principal amount of the loan, and the term of the loan (10 years, 15 years, 30 years) and calculate the monthly payment. If the mortgage is purchased at par or without points, the interest rate is the annual percentage rate of the loan.
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Account for costs associated with a loan such as bank charges, home inspection and other costs deemed necessary to purchase the house. Total the amount and add to the mortgage amount as if they were bundled into the mortgage amount. Use the same calculation as in step 2. Calculate the difference in monthly payments.
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Use an adjustable rate mortgage if you believe you will only live in a house for a few years. Adjustable mortgages cannot be calculated to maturity since the future interest rate is unknown. However, estimate the real cost of the mortgage by adding any points charged and purchase costs for the mortgage. Enter the amount of your monthly payment and solve for the interest rate. Your effective interest rate will probably be much more than you think. For example, a five-year adjustable mortgage at 6 percent with 2 percent in fees would be computed as follows: 2 percent /5 = 0.4 percent . Six percent +0.4 equals a 6.4 percent mortgage.
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Understand that graduated payments, bimonthly payments, and prepayments on mortgages do not affect the rate of your mortgage. That is determined at the closing. These extra payments do affect the term of your mortgage by reducing the principal amounts due and thus shortening the number of years necessary to pay off a mortgage. For example, one extra mortgage payment per year on a 30-year mortgage reduces the loan maturity to about 19 years.
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Take the amount of your loan and consider refinancing if the new mortgage rate is at least 1.25 percent lower than your current rate of interest. Make certain to take into account all closing costs associated with a new mortgage in order to properly compute the savings.
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Tips & Warnings
Consider a long fixed-rate mortgage to an adjustable rate if you will remain in the house for more than seven years. You can always refinance if lower rates later prevail.
Do not roll over a mortgage if it comes due in just a few years. The total dollars paid for the additional years will offset the small savings of the lower interest rate.
References
Resources
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