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


How to pick the perfect home loan in Washington State (2024)

Aug 8, 2022, 21:39 PM by User Not Found
With home prices and mortgage interest rates spiking in a volatile market, it’s more important than ever to choose a home loan that meets your needs.

When financing a home, mortgage interest rates significantly impact the overall cost of buying a home in the long term. A 1% difference in mortgage interest rate adds up to thousands of dollars over the course of 15 to 30 years.  Your interest rate is affected by many factors including credit score, down payment, and loan type. When financing your home there are different loan options to meet your needs and goals. 

Each type of mortgage is designed for a different type of borrower, so each comes with different pros and cons. Solarity offers a variety of mortgage types and terms, and we’re committed to finding one that works well for you.

Fixed rate

A fixed-rate mortgage keeps the same interest rate for the life of the loan, as opposed to an adjustable-rate mortgage in which the interest rate can fluctuate. The advantage here is that since you know that your rate is locked, budgeting for your housing payment is easy and predictable. You’re protected from sudden changes in interest rates, even if yours isn’t the lowest one on the market.

If you’re purchasing a home that you’re confident you’ll keep for a long time and you want to sleep well at night knowing your monthly mortgage payment won’t change, a fixed-rate mortgage is a great option. This is one of the most common types of residential mortgage loans.

Adjustable rate

Adjustable-rate mortgages, sometimes referred to as ARMs, have interest rates that can change to match the prevailing market rates. You might wonder why anyone would want an adjustable-rate mortgage when fixed rates are available. ARMs come with a unique advantage — during the first few years (usually three to seven), the interest rate is temporarily locked in at a lower rate than what you would see on a typical fixed-rate loan. Then, after this intro period, the rate will adjust up or down each year to match the market.

While most homeowners are better off with the security of a fixed-rate loan, adjustable-rate mortgages are a helpful tool for homeowners who are likely to move or refinance before the lock-in period is over. 

No down payment

For many working families, the down payment can be a huge barrier to homeownership. But it doesn’t have to be this way. If you have a steady income and can afford a house payment (but are a little short on cash), a no-down-payment mortgage is a great avenue to becoming a homeowner. 

No-down-payment loans require you to pay private mortgage insurance (PMI) with each payment, but this is still often cheaper than renting. Plus, you’ll be building equity as you pay off your home.


US Department of Agriculture (USDA) loans are ideal for low to moderate-income buyers that are looking for their own slice of heaven in the country, but they’re also perfect for people who are shopping for homes in rural towns (up to 35,000 people). The purpose of these loans is to boost the economy and population of agrarian and rural areas.

USDA loans are attractive because they can fund up to 100% of the purchase price of the property, and they require no down payment. However, your income cannot be above a certain threshold, and your future home must meet certain guidelines to qualify

Bridge loans

Timing the sale of your existing home with the purchase of a new one can be exceptionally difficult, especially if you are planning to use your home equity as part of the down payment. This is when a bridge loan comes in handy.

Bridge loans are designed to cover the gap between the sale of one house and the purchase of another. They allow you to “forward” the equity from your old house to your new one. With a bridge loan, you can finance up to 90% of the appraised value of your property, and you make interest-only payments for up to 24 months. To make things even simpler, you can close your bridge loan at the same time as your new purchase.


Refinancing allows you to reconfigure your loan so you can lower your payment, get a shorter term, or cash out some of your home’s equity. If you need to finance some major home repairs or pay off high-interest debts, a cash-out refinance can help you reach your goals.

Also, if current interest rates are lower than the one you have on your original mortgage, refinancing to a lower rate will potentially save you thousands of dollars in interest over the life of your loan. You can also use a refinance to change an adjustable-rate mortgage into a fixed-rate mortgage. In short, if your original mortgage isn’t ideal, you can refinance it into a loan that is.


A home equity line of credit (HELOC) allows you to tap into your home’s equity without altering your original mortgage. If you already have a low-interest rate or are close to paying off your home, a HELOC might make more sense than refinancing. 

With a HELOC, you can borrow against your home as you need the money. In many ways, a HELOC is like a credit card that’s secured by your house. During the draw period, you can withdraw from your home’s equity and pay only on the interest. As you repay your HELOC, you free up credit to borrow again in the future, much like a credit card.

Home loans with a boost

Introducing Solarity Credit Union and the best mortgage experience you’ll ever have. We make the home loan process fast and easy. You can apply online in just a few minutes.

Rated 93 out of 100 by thousands of Solarity borrowers, our online mortgage process saves you time so you can focus on the things that really matter. And our expert Home Loan Guides are here to help every step of the way.