Imagine, using the below mortgage calculator to evaluate different mortgage loan scenarios, some you've probably never thought of, in order to save a few thousand dollars.
Sounds useful, right?
That's precisely the aim of this web page — to provide you with the background and understanding to help you determine which mortgage is best for you.
Most consumers are painfully aware when shopping for a mortgage loan that they are about to make the biggest personal purchase of their life. According to the Mortgage Bankers Association (via housewire.com), the size of the average mortgage in the US hit an all-time high. As of March 2017, the typical loan size was $313,300.
Further, even at today's relatively low interest rates, the consumer will pay back nearly double the amount borrowed due to interest charges and fees. A borrower should welcome any techniques that can use to reduce these costs.
Continue reading below for some specific, money-saving tips on how you can use this calculator to make an informed financial decision....»
You can use this calculator to answer such questions as:
Mortgage payments are generally a significant portion of any family's monthly budget. Typically the mortgage loan consumes 25% or more of the monthly income. Hopefully, most consumers know if they make extra payments or agree to bi-weekly payments they can save a small boat load of interest over the term of their loan. Now, certainly these strategies are useful, and they will, in fact, save you money. Depending on your other investment options, they certainly should be considered.
But what if you don't have the free cash flow to make extra payments? Are there money saving strategies that don't require sacrifice?
Well yes, in fact, there are. Read on for two such ideas for you. Naturally, you'll want to plug your numbers into the calculator to see what you can save.
Normally one would think that the larger the down payment amount, the less the amount borrowed. The lower loan amount means a lower accumulated interest charge over the term of the loan. That's what one would think, and usually, that would be correct. But at least in the US, mortgage borrowers have another option.
Borrowers can pay points. Points are nothing more than an up-front fee lenders charge in exchange for a lower interest rate. The lender will calculate the amount owed for points as a percentage of the total loan. On a $300,000 loan, 2.5 points equals $7,500.
So you're thinking, I understand what points are. And I do plan to be in this house for a dozen years or more. Also, it sounds good to pay something up front in exchange for a lower interest rate, but what if I don't have the available cash to pay points? Am I out of luck?
How much cash do you have for a down payment? Twenty percent or more?
If that's the case, it may save you money if you give the lender less for a down payment and use that money to pay a couple of points. Let's look at an example.
In the calculator, enter the following values:
Since we are comparing mortgage strategies only, make sure "Annual Property Taxes?:", "Annual Insurance?:" and "Private Mortgage Ins. (PMI)?:" are all set to "0".
The calculator is going to calculate both the mortgage loan amount and the monthly payment since you have entered zeros for those inputs.
The truly important number, however, is total interest. Checking at the bottom of the calculator, just above the buttons, you'll see for our example loan that you would pay $217,836 in interest over the term of the loan. Make a note of this number. You'll need it for the next step.
There is one more calculation. Change the following inputs (the others are left as they are):
What we have done is reduce the down payment amount by 2% and added 2 points. When you add points, you are buying a lower interest rate. In this (conservative) example, adding 2 points lowers the fixed interest rate by 1/4 of a percent over the entire term of the loan. You may find in your area that you can reduce your rate more -- maybe by 0.333% or even 0.4%.
We are now ready to calculate the new mortgage details. This time, since all the important numbers are on the schedule, click "Payment Schedule." (It is not necessary to click "Calc.")
There are two totals in the summary section of the schedule we need to know:
They total $213,856.
Compare this to the total interest from the first calculation when the down payment was larger, and there were no points — $217,836.
The mortgage with the second set of features will save you $3,970.
Not only will you save nearly $4,000, but there's also icing on the cake (and it's calorie free!). The savings come to you without you having to make any sacrifices. You do not have to go through anything other than the typical mortgage approval process. You do not have to submit a different application or do additional paperwork. And you do not have to have any extra money up front.
The cool part is, if you look at your payment, your monthly payment will decrease from $1417 to $1410! Woopie!
There's even more...
If you are in the US and you itemize deductions when you pay income taxes, points are often a deductible cost for obtaining a mortgage. This means Uncle Sam (and other American taxpayers) is helping you out by lowering your tax bill. If you are in the 33% marginal tax bracket, $4,000 paid as mortgage points will save you $1,320 in taxes in the year you file after taking out the mortgage.
This is a win, win, win, win.
A word of caution is in order here. You'll only want to employ the second strategy if you plan to stay in your home for a relatively extended period. If you expect to move in say 5 or even ten years, you may not save enough in interest charges to make up for the points. Use the payment schedule to find your break-even point. I should also note one point that some may consider being a disadvantage. You'll have slightly less equity in your home in the early years of the mortgage. This is because you've traded points for additional down payment.
Let me know in the comments what you think of this tip. Will you consider using it?
I think my next tip is even better...
Lenders hate this.
But if you are the borrower, you should love it.
When applying for a mortgage, lenders ask for a lot of documentation. One item they want to see are your bank account statements. They are looking at your cash flow to see if you have two or even more payments available beyond the down payment amount you have agreed to in the purchase contract.
All well and good.
Since the lender wants you to have a payment or two already in the bank, give it to them as early as possible. Often, the first loan installment is not due until the first of the month after the month following the closing. (Close on March 20th, and the payment is due on May 1st.) Instead of waiting though, hand the lender a check for the first payment on the day you sign the mortgage papers.
Why would I want to do that?
In the calculator, enter the following values:
Once again, since we are comparing only mortgage strategies, enter "0" for "Annual Property Taxes?:", "Annual Insurance?:" and "Private Mortgage Ins. (PMI)?:".
The calculator will solve for both the mortgage loan amount and the monthly payment since you've entered zeros for those inputs.
Click "Payment Schedule."
Make a note. Total interest due is $208,527, and the first payment is paid one month after the loan date. This is an "end-of-period" schedule.
Now for the comparison calculation....
Change the following inputs (the others are left as they are):
These changes set the calculator to calculate the loan term.
Again, click "Payment Schedule."
Notice how the first payment now falls on the closing date of the loan? Also, notice for the first installment, there is NO INTEREST DUE. Why? Because no days have passed! Interest is charged/collected only for days when the money is on loan.
Now total interest due is $205,236.
By making this one simple change to the payment schedule, you will save $3,291 in interest charges over the term of the loan. Furthermore, you'll have to make only 258 payments, not 360 and the last payment will be due on February 1, 2047, not May 1, 2047.
Like the first tip, this tip does not require you to make any fundamental change to what you were already planning to do. In fact, you don't even have to tell your lender that you are going to do this. Just hand them the check on the day you close the loan.
If you decide to use this money saving strategy, understand the payment you provide your lender at closing is only a mortgage payment. You do not have to give them any escrow amount they might be collecting with later payments. Escrow is something separate. An escrow amount typically is added to the regular mortgage payment, and it is used to cover property taxes and insurance. Again, you pay them only the mortgage part of your total payment at the closing.
Also, it is a good idea to closely monitor your new mortgage account and confirm that this first payment is applied 100% to principal. If it's not, then you won't get the full benefit of this technique.
Unlike our general loan or simple loan calculators, this calculator will allow you to have more than one unknown value in certain cases.
To indicate an unknown value, enter '0' (zero). There must be one unknown in each group — that is two unknowns are required.
You can enter the price of the real estate, the down payment percent you need, the total number of periods for which you want to borrow the money and the interest rate. When you click on "Calc", the loan amount and the monthly payment will be calculated.
If you enter the loan amount and "0" for the down payment percentage, then the down payment percentage (and down payment amount) will be calculated.
If you enter "0" for the price, a down payment percentage, "0" for the mortgage amount, the total periods, the interest rate and the payment you can afford, the calculator will calculate the loan amount and the price you can afford to pay. You can use this calculation to tell you what you can afford to pay and borrow and still stay within a budget.
Annual Property Taxes, Annual Insurance and Private Mortgage Ins. (PMI) are all optional. If you enter values, the periodic portion of each will be calculated and shown on the schedule. Property taxes and insurance are both included under escrow.
If a borrower does not have cash to cover at least 20% of the purchase price, some lenders will require the borrower to purchase private mortgage insurance to cover against a possible default. Premiums are typically 0.5% to 2.0% of the original loan amount. The borrower can drop the insurance coverage once the mortgage balance is less than 80% of the original purchase price. The calculator handles this automatically. (There may be other conditions as well under which the lender will no longer require the PMI. One such case might be apprciation of the real estate.)
Points are charges that are normally due at closing. It is an optional input. Borrowers (normally only in USA) may select to pay a lender "points" up front in exchange for a lower interest rate. Points are expressed in percent and are calculated on the amount borrowed. 3 points on a $200,000 mortgage equals $6,000. If the user enters points, this calculator includes their value in the summary and as part of the total payment at loan origination on the payment schedule.
Now granted, saving $3,000 or $4,000 maybe doesn't seem like a lot on an obligation where the total payments are going to total close to half a million dollars and that are going to take you 30 years to pay back. But the point is, it is better to know about these loan strategies, and then you can use this mortgage calculator to see if your savings warrants you using one of both of them.