In this article we are going to step you through the use of a mortgage calculator. Sample calculations for both fixed rate and adjustable rate mortgages will be displayed. Also shown will be how to calculate the interest saved by making extra principal payments.
The mortgage calculator shown on the right side of any page on this site can be used to practice these calculations. People always ask “What will my payment be?”. This is relatively simple to calculate with our calculator. Let’s start with an example of a $500,000 loan for 20 years at a fixed rate of 5.0%. Put the loan amount without the dollar sign nor any punctuation into the box labeled “Principal”. Right below that insert the interest rate including any decimal points. The length of the loan goes into the “Term” box. Use the pull down arrow and select the appropriate number of years. Yearly taxes and insurance will be estimated and autofilled but can be overridden and changed or deleted altogether. Now press the calculate button. The window below the Calculate Button will display the Monthly Payment of principal and interest, any taxes, and any insurance along with the Total Payment. The left and right arrows will allow you to display the monthly payment figures, the annual payment figures, or the Total Payment for the life of the loan. The pie chart shows the payment, taxes, and insurance in visual form. We see that the monthly payment (principal plus interest) is $3299.78. Any monthly taxes and insurance will be shown and the total monthly loan payment. This loan is for 20 years or 240 months.
Now click on the amortization schedule link to see a table showing all 240 payments. The principal portion, interest portion, taxes, insurance, and remaining balance for each of the 240 payments is shown in a table. Examining this table gives us considerable insight into how a mortgage loan amortizes. Look at the first payment. The principal portion is $1216.45 and the interest portion is $2083.33. In the beginning more of your payment is interest. Now look at the last payment produced by the mortgage calculator. The principal is $3285.89 and the interest is $13.69. Virtually all of your payment is being applied toward principal at the end.
You may ask, ”What if my loan has an adjustable feature?” In commercial mortgages this is more likely the case rather than having a fixed rate for the life of the loan. A typical bank loan will be written for five years with a balloon payment or refinance required at the end of five years. The monthly payment will be calculated as though the loan was going to last 20 years or maybe more. If the bank renews the note it will be written at an interest rate that generally reflects the current interest rates. The new note will usually be for another five years but with an amortization of 15 years instead of 20 years. This process will repeat itself every five years until the loan is paid off. The mortgage calculator is still very useful for estimating how the loan would be paid back. Various estimates can be used to examine several possible scenarios depending on what you think interest rates will do in the future.
Some borrowers will want to make additional principal payments to pay the loan off sooner and save on interest payments. This mortgage calculator can be used to show what happens when these extra payments are made. Lets now assume that an extra $500.00 per month is enclosed with the regular payment and see what happens. Put the $500.00 per month into the “Extra” box and hit calculate again. The new monthly payment figure will reflect the additional $500.00 per month paid. Click on the amortization table link and scroll down to the bottom of the table. You will now see that the extra $500.00 per month has reduced the total number of payments to 192 instead of 240. The total interest paid on the loan will now be $226,222.14 instead of $291,947. The difference represents a savings of $65,724.86.