How does a home loan calculator work?

Mortgage calculators are online tools that estimate your monthly mortgage payment and terms, offering personalized loan recommendations, including:

  • Monthly payment breakdown (principal, interest, taxes, insurance, HOA fees and PMI)
  • Loan term (in years)
  • Fixed or adjustable interest rate options
  • Interest rate and annual percentage rate (APR)
  • Estimated closing costs (attorney fees, lender charges, title insurance, etc.)

 To use a mortgage calculator, provide essential details like:

  • Home price
  • Down payment amount or percentage
  • Property type and location
  • Monthly expenses (taxes, insurance, HOA fees, etc.)
  • Credit score

Monthly mortgage payment components

To determine your monthly mortgage payment, start by entering the home price or your expected loan balance after refinancing. Subtract your down payment and include any additional costs rolled into the loan balance.

The interest rate significantly affects your monthly payment. In the early stages of a mortgage, a substantial portion covers interest. Focus on the base rate, not the annual percentage rate (APR), as it excludes closing costs. While APR considers the loan's overall cost, it doesn't directly impact monthly payments.

Your chosen term (e.g., 15 or 30 years) dictates how long you'll repay the loan. Longer terms mean lower monthly payments but higher total interest costs. Shorter terms result in larger monthly payments but reduced overall interest expenses.
If your down payment is below 20% on a conventional loan, you'll need private mortgage insurance (PMI). PMI rates depend on factors like the loan amount, down payment, credit score, and loan type. It's often removable once you reach 20% equity.
Typically included in your mortgage payment, ensure you have an accurate estimate of your annual property taxes for cost assessment. Homeowners Insurance: Lenders require homeowners insurance. The overall premium is often split into monthly payments, even without an escrow account.
HOA fees aren't part of your mortgage payment but are crucial for overall homeownership costs and loan eligibility considerations.

Frequently asked questions

Your monthly mortgage payment can be calculated using the following formula: M = P [ I(1 + I)^N ] / [ (1 + I)^N - 1] 

Here's a breakdown of the variables within the formula to help you understand it better: 

  • M = monthly payment: This is the value you want to find. 
  • P = principal amount: It represents your loan balance, which is the amount you're aiming to pay off. 
  • I = interest rate: Be sure to use the base interest rate, not the APR. To get the monthly interest rate, divide the annual rate by 12. 
  • N = number of payments: This is the total count of payments throughout your loan term. For example, in a 30-year mortgage with monthly payments, there would be 360 payments in total. 

It's worth noting that mortgage calculators typically assume fixed-rate mortgages. However, if you have an adjustable-rate mortgage (ARM) with changing interest rates over time, you can set up an amortization table using spreadsheet software like Microsoft Excel. This allows you to adjust the formula when the interest rate changes, ensuring your calculations remain accurate.

To calculate the principal of your mortgage, you start by deducting your down payment from the total purchase price of your home. 

Let's illustrate this with an example: If you're purchasing a house for $450,000 and you make a 20% down payment, which amounts to $90,000, your remaining loan amount is $360,000. This $360,000 is your principal balance. 

Understanding the principal is crucial when determining your home affordability because it's the base amount you borrow, and interest begins accumulating as soon as you secure the loan. To get an estimate of your monthly mortgage payment within your budget, you can use our mortgage calculator. By entering details like the purchase price, down payment, and other relevant factors, the calculator provides you with a rough monthly payment estimate. Remember that when setting a comfortable mortgage payment, you should also consider other expenses such as maintenance, insurance, taxes and repairs associated with homeownership.

Continuing with our example, suppose you have a 30-year mortgage with an annual interest rate of 7%. Because you're making monthly payments, the 7% annual interest rate is divided by 12 to calculate the monthly interest. In this case, your initial monthly payment would consist of $2,625 in interest, which is computed as follows: ($450,000 principal × 0.07 annual interest rate) ÷ 12 months. 

To break it down further: The principal is determined as the purchase price minus the down payment. The monthly interest is computed by taking the principal and multiplying it by the interest rate, then dividing it by 12 months. The monthly principal can be found by subtracting the interest payment from the total monthly mortgage payment. In summary, the initial monthly payment on your mortgage is divided between the interest and principal components, with the interest being a portion of the outstanding loan balance, while the principal is the remainder.

On a $300,000, 30-year mortgage with an 8% APR, you can expect a monthly payment of about $2,201.29, not including taxes and interest (these vary by location and property).

On a $400,000, 30-year mortgage with an 8% APR, you can expect a monthly payment of about $2,935.06, not including taxes and interest (these vary by location and property).

 Prospective homebuyers' ability to afford a property and the size of the loan they can secure largely depend on various factors, but the main considerations include their income, debt, assets and liabilities.

  • Gross income: This is your total income before taxes and other financial commitments. It encompasses your base salary, any additional income like bonuses, part-time earnings and self-employment income, as well as benefits such as Social Security, disability, alimony and child support. 
  • Front-end ratio: This ratio, also known as the mortgage-to-income ratio, is determined by your gross income and represents the percentage of your annual gross income that can be allocated to your monthly mortgage payment. The monthly mortgage payment includes principal, interest, taxes and insurance (PITI). A general guideline is that the front-end ratio, based on PITI, should not exceed 28% of your gross income. However, some lenders allow borrowers to surpass 30% or even 40%. 
  • Back-end ratio: The back-end ratio, or debt-to-income ratio (DTI), calculates the portion of your gross income needed to cover your debts, including credit card payments, child support and other outstanding loans (such as auto or student loans). For example, if you pay $2,000 in debt services each month and earn $4,000 monthly, your ratio is 50%—half your income goes toward debt. Most lenders recommend that your DTI does not exceed 43% of your gross income. 
  • Credit score: Mortgage lenders evaluate your credit score to assess the risk of lending to you. A low credit score may result in a higher interest rate (APR) on your loan. To secure a home, monitor your credit reports and address any inaccuracies promptly.
  • The 28%/36% rule: This heuristic helps calculate the appropriate amount of housing debt to assume. According to this rule, a maximum of 28% of your gross monthly income should cover housing expenses, and no more than 36% should go toward total debt service, which includes housing and other debts like car loans and credit cards. Lenders use this rule to gauge whether to extend credit to borrowers and sometimes it is adjusted to use slightly different percentages, such as 29%/41%.

Helpful articles and information


5 tips for planning your monthly budget for homeownership

Apr 13, 2022, 22:20 PM by User Not Found
Use a loan payment calculator to assist you in estimating your potential monthly home loan payment and determine if you can truly afford the house you want.

Homeownership and budgeting go hand in hand. Many people find that budgeting is the key to buying a home and making mortgage payments on time, and a good monthly budget can help make your homebuying goals a reality. This is why Solarity Credit Union offers our loan payment calculator to borrowers. Understanding the cost of your monthly mortgage payments will make it that much easier for you to develop a monthly budgeting plan. If you’ve been considering applying for a home loan, then you’ll benefit from these helpful budgeting tips for homeownership.

1. Determine how much home you can afford

Getting a rough estimate of how much your mortgage payment will be is easy when you have the right tools. Lucky for you, you don’t have to be a math whiz to get an accurate estimate of your payments. Use Solarity’s loan payment calculator to assist you in estimating your potential monthly home loan payment. This is a helpful tool for future homebuyers to determine if they can truly afford the kind of house they’re interested in.

To use the loan payment calculator, you’ll need to have a rough idea of some financial details. What is the purchase price of the home you’re considering? How much do you have for a down payment? Answering these questions will make your estimate more accurate. You don’t need to know the exact numbers, though. You can play around with the calculator to get an idea of how your payment is affected by different purchase prices and down payment amounts.

The payment calculator also gives you the option to choose a loan term between 10 and 30 years. A higher term usually means a lower monthly payment but more money paid over time. Try a couple of different terms to see which fits your budgeting needs better.

2. Figure out your household income

Income is one of the deciding factors when it comes to getting approved for a home loan. Lenders like to know that you’re bringing in enough money on a monthly basis to cover the costs of both your loan and your monthly expenses. When considering homeownership, you should determine how much money you’ll have to work with each month.

Your household income isn’t necessarily limited to just what’s shown on your paycheck. On the contrary, income can include money from a side gig, such as freelance work, or from a secondary job. It could include the income of your spouse or partner, if you’re buying the house together, or disbursements from an account such as an annuity or pension.

Add up these multiple streams of income to determine your total household income. Having an accurate idea of that amount will be helpful when building your budget and determining how much home you can afford to buy.

3. List your monthly expenses

When thinking about homeownership, it’s important to take into account your total monthly expenditures, including the cost of your housing (whether that’s rent or a mortgage). To get an accurate picture of your current financial situation, make a list of all your recurring monthly expenses. This can help you understand where your income is going every month and how much more you might be able to allocate toward your housing expenses when you become a homeowner. You may find that you need to make adjustments in order to budget well for homeownership.

Some examples of monthly expenses might include groceries, clothes, utilities, insurance, transportation and eating out. After a few months of observation, you may find that you’re spending more than necessary in one category. Correcting that category to spend less may help make homeownership a reality for you. Writing this information down and creating a visual is a great way to enforce budgeting goals and increase your savings toward homeownership.

4. Understand what additional payments you’ll be making

Many potential homebuyers think that their rent payment will just be replaced by a mortgage payment, but there’s more to it than that. Buying a home will require you to also pay for a few other monthly necessities. Those unexpected payments may very well increase your monthly living expenses to more than what you’re paying in rent, depending on where you live. Understanding what payments will be expected of you after you buy your home can help you plan your new monthly budget.

One of the new payments you’ll be required to make will come in the form of taxes. Property taxes will vary depending on what city or state you live in, but most places will require you to make them. Home insurance and homeowner’s association (HOA) fees are a few other monthly payments you’ll need to account for. Home insurance is typically required by all mortgage lenders, while HOA fees will only be necessary depending on the neighborhood you live in. You could have private mortgage insurance payments, too, depending on the size of your down payment. And don’t forget to set aside money for normal home repairs that come up.

While these fees may only be required annually or semiannually, it’s helpful to break down those costs into a monthly amount when budgeting and put that money aside in a separate account. That way, you’ll have the money available when the expense is due, and you can make the payment on time without straining your budget. Accounting for these extra expenses early in your planning can help you determine whether or not you’re truly ready to take on the responsibility of buying a home.

5. Pay off debts

Debt can play a major role in your monthly budgeting, depending on your priorities. If your budget is tight, you may have put some of your debt on the back burner. This is often done by paying the absolute minimum on debt payments or, in some cases, skipping payments altogether, whether done purposely or accidentally.

To give yourself the upper hand, you should prioritize paying off your debt when you budget for homeownership. The amount of debt you have can affect how much you are able to borrow when you’re ready to buy a home. Lenders look at your debt-to-income (DTI) ratio as an indicator of your ability to repay your mortgage. For this reason, it’s best to pay off as much debt as you can before you begin applying for home loans. And when that’s not an option, you should build an aggressive payment plan into your monthly budget so you can get rid of your debt as quickly as possible.

Homeownership can become a reality when you have the right tools to budget correctly. Check out Solarity Credit Union’s loan payment calculator or speak with one of our expert Home Loan Guides to get a better idea of how much home you can afford today.