How Mortgage Calculators Work (And Help You Save Money)

mortgage calculators

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If you’re planning on buying a home, but are unsure about how large your mortgage should be and what it costs to run a home, that’s when mortgage calculators come in handy.

There are two types of calculators: a mortgage affordability calculator and a mortgage payment calculator.

Mortgage Affordability Calculators

Before buying a home, you need to determine how much you can afford.

Your affordability is based on your household income, monthly personal expenses (car, credit card debt, and other loan payments), and the costs associated with owning a home (things like property tax, condo fees, and heating costs).

You also have to calculate if you have enough money saved up to buy a home. You’ll need that money for a down payment, plus closing costs (such as legal fees and title insurance). The costs will depend on various factors including what kind of property you’re buying (home or condo) and where it’s located.

Lenders will look at two affordability rules when determining the mortgage amount you qualify for. The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly household income. Those costs include mortgage principal and interest, property taxes, and heating costs, known as PITH in the mortgage industry world – principal, interest, taxes, heating. For condominiums, PITH includes half of your monthly condo fees. This figure is called the gross debt service ratio.

The second rule is that your monthly debt costs shouldn’t be higher than 40% of your gross monthly income. Your debt costs include your housing costs as well as any other debt payments, such as credit card/loan interest, car loan or lease payments, and line of credit payments. This figure is called the total debt service ratio.

You also need to have a down payment of at least 5% before buying a home and if you aren’t able to put down more than a 20% down payment, you’ll need to purchase mortgage default insurance, which is more commonly known as CMHC Mortgage Loan Insurance. And you’ll also need to set aside anywhere between 1.5% and 4% of your home’s selling price to cover closing costs.

If you find it too difficult to calculate all these numbers, a mortgage affordability calculator will do the work for you. It will determine the amount you could qualify for by crunching the numbers.

Mortgage Payment Calculators

Once you know how much you can afford, you can use a mortgage payment calculator to determine what your payments will be. You’ll need to enter the mortgage amount, what your down payment will be, your amortization period, the mortgage rate, and the mortgage type (fixed or variable).

A good calculator will allow you to test choose different interest rates and vary payment frequency so you can see how much your payments will be under different scenarios. This will allow you to compare the advantages and disadvantages of different rates and types of mortgages – which comes in vary handy if you want to plan to pay off your mortgage faster.

Some calculators will also include your property tax, property insurance, phone, cable, internet, and utility costs so you’ll have a better idea of what your monthly expenses will be.

A mortgage payment calculator will also show your principal and interest costs and often calculate what your balance will be at the end of each year. You’ll also see how much interest you have to pay, and once you see how much it is, you may decide to make biweekly or accelerated payments instead of monthly payments.

Although the amount of debt you take on to buy a home may seem daunting, you’ll be making a dent in your mortgage debt and slowly build up equity in your home. Using a mortgage payment calculator is a great way to determine the cost of a mortgage and you could use it to decide whether or not to pay off your mortgage faster.

Make A Plan For Your Mortgage

A mortgage is not only a large amount of debt to take on, it’s also a big responsibility. Although you may be able to afford a large mortgage, it doesn’t mean you should buy a property at the top end of your budget. If you buy a house, there could be unanticipated costs, such as needing to replace your roof or furnace. In the case of a condo, there might be a fee increase due to major repairs or to keep up with rising maintenance costs. It’s best to be prepared for the unexpected so you don’t want to overextend yourself.

It’s important to use a mortgage affordability calculator so you know how much you can spend. And a mortgage payment calculator will give you an idea of what your monthly expenses will be. Knowing what the costs are will allow you to budget accordingly should there be any unforeseen expenses.

Ratehub.ca is a financial services comparison site that helps Canadians find  the best products to meet their needs. The education centres, tools and calculators were designed to empower users to make smart financial decisions.

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