Calculate a Mortgage Payment

When you decide it is time to purchase a home you will need to know how to calculate a mortgage payment. No need to be a math genius, but you will need to do your research. There are a wide variety of ways to calculate your payment. Basically all you need to know is how much money you will want to borrow and your credit rating.

First you will need to take into consideration what type of mortgage you would like. Based on your credit, income and how long you would like to have your mortgage you may choose a balloon mortgage, adjusted rate mortgage (ARM), or a fixed mortgage. Each choice is significantly different, so knowing what matches your financial needs is a must!

A balloon mortgage is one that you pay over time, then after a period of five or seven years you have to make a large payment (the balloon reference), or re-finance the loan. In an ARM, your interest could change daily. One day you could be paying 5% and in a month you may be 8%. The rates could just keep climbing higher and higher. A fixed rate mortgage may be higher than an ARM at first, but it does not change. The 7% you pay in year one, will be the same 7% you pay in year 8, year 10 or year 15 etc.

How much money do you have? Usually your loan payment for a home will be based on 25-43% of your income. It is safe to have a mortgage payment that is around 1/3 of your monthly income. For example, if you bring home $1200.00 per month, you will generally not want to pay more than about $400.00 per month on a home loan.

Do you know what your credit rating is? Your credit rating can generally be summed up as poor, fair, good, or excellent. Lower interest rates are associated with good or excellent credit. Poor or fair credit means you will probably have a high interest rate. The interest rate is usually calculated based on two different types of simple interest loans.

In a simple interest loan your interest is accrued daily. So day one of the month you owe $350 plus $10. Day two of the month you would owe $350 plus $20. This would continue daily, until you make your payment. Once you make your payment you would have a new principle (the amount that you borrowed) to calculate your interest rate from. This would mean you would be paying less interest each time you make a payment.

Most mortgages are based on the simple interest version, but the interest is calculated monthly. Whether you pay your note early or on time will not matter because the payment is the same. When you calculate your payment you need to make sure you know if your interest is daily or monthly.

Whichever way you choose to calculate a mortgage payment, the important thing to remember is research. While a basic mortgage calculator may give you what your payment will be, you may want to look at advanced models as well. The more advanced the calculator, the more you will know about your mortgage and how it can serve you.