Mortgage Calculator

Understanding Your Mortgage

A mortgage is one of the most significant financial commitments you'll ever make. Understanding how it works is crucial for making informed decisions. This calculator helps you see a clear breakdown of your potential monthly payments and the total cost of your loan over its lifetime.

How Your Monthly Payment is Calculated

The calculation for a mortgage payment is based on a standard amortization formula. This formula balances the loan amount (principal) and the interest over the loan term, ensuring that the loan is fully paid off by the end.

The key factors influencing your payment are:

• Loan Amount (Principal): This is the total amount of money you borrow from the lender. The lower the principal, the lower your monthly payment will be.
• Interest Rate: The annual cost of borrowing money, expressed as a percentage. This is one of the most impactful factors on your payment. A lower interest rate can save you tens of thousands of dollars over the life of the loan.
• Loan Term: The period over which you'll repay the loan. Common terms are 15 or 30 years. A shorter term (like 15 years) means higher monthly payments but significantly less total interest paid. A longer term (like 30 years) results in lower monthly payments but a much higher total interest cost.

Principal vs. Interest

As you can see from the pie chart, your total payment is split between two components:

• Principal: The portion of your payment that goes directly towards paying down your loan balance.
• Interest: The portion of your payment that is profit for the lender.

In the early years of a mortgage, a larger portion of your payment goes towards interest. As you continue to make payments and your loan balance decreases, more of your payment starts going towards the principal. This is the nature of an amortizing loan.

How to Get a Better Mortgage Rate

Securing a lower interest rate can dramatically reduce your monthly payments and total loan cost. Here are some tips:

• Improve Your Credit Score: A higher credit score signals to lenders that you are a low-risk borrower, often resulting in better loan offers.
• Save for a Larger Down Payment: A down payment of 20% or more can help you avoid Private Mortgage Insurance (PMI) and may qualify you for a lower interest rate.
• Shop Around: Don't just go with the first lender you talk to. Compare offers from multiple banks, credit unions, and mortgage brokers to find the best deal.
• Choose a Shorter Loan Term: If you can afford the higher monthly payments, a 15-year mortgage typically comes with a lower interest rate than a 30-year mortgage.