### Mortgage calculator with extra monthly payments to principal -

## Mortgage Payoff Calculator

### If You Know the Remaining Loan Term

Use this calculator if the term length of the remaining loan is known and there is information on the original loan – good for new loans or preexisting loans that have never been supplemented with any external payments.

### Payoff in 15 years and 8 months

The remaining balance is $279,163.07. By paying extra $500.00 per month, the loan will be paid off in 15 years and 8 months. It is **9 years and 4 months earlier**. This results in savings of **$108,886.04** in interest.

**If Pay Extra $500.00 per month**

Monthly Pay | $2,298.65 |

Total Payments | $538,628.53 |

Total Interest | $238,628.53 |

Remaining Payments | $430,709.43 |

Remaining Interest | $151,546.36 |

**The Original Payoff Schedule**

Monthly Pay | $1,798.65 |

Total Payments | $647,514.57 |

Total Interest | $347,514.57 |

Remaining Payments | $539,595.47 |

Remaining Interest | $260,432.40 |

View Amortization Table

### If You Don't Know the Remaining Loan Term

Use this calculator if the term length of the remaining loan is not known. The unpaid principal balance, interest rate, and monthly payment values can be found in the monthly or quarterly mortgage statement.

### Payoff in 14 years and 4 months

The remaining term of the loan is 24 years and 4 months. By paying extra $500.00 per month, the loan will be paid off in 14 years and 4 months. It is **10 years earlier**. This results in savings of **$94,554.73** in interest.

**If Pay Extra $500.00 per month**

Remaining Term | 14 years and 4 months |

Total Payments | $343,122.63 |

Total Interest | $113,122.63 |

**The Original Payoff Schedule**

Remaining Term | 24 years and 4 months |

Total Payments | $437,677.36 |

Total Interest | $207,677.36 |

View Amortization Table

The Mortgage Payoff Calculator above helps evaluate the different mortgage payoff options, including making one-time or periodic extra payments, biweekly repayments, or paying off the mortgage in full. It calculates the remaining time to pay off, the difference in payoff time, and interest savings for different payoff options.

### Principal and Interest of a Mortgage

A typical loan repayment consists of two parts, the principal and the interest. The principal is the amount borrowed, while the interest is the lender's charge to borrow the money. This interest charge is typically a percentage of the outstanding principal. A typical amortization schedule of a mortgage loan will contain both interest and principal.

Each payment will cover the interest first, with the remaining portion allocated to the principal. Since the outstanding balance on the total principal requires higher interest charges, a more significant part of the payment will go toward interest at first. However, as the outstanding principal declines, interest costs will subsequently fall. Thus, with each successive payment, the portion allocated to interest falls while the amount of principal paid rises.

The Mortgage Payoff Calculator and the accompanying Amortization Table illustrate this precisely. Once the user inputs the required information, the Mortgage Payoff Calculator will calculate the pertinent data.

Aside from selling the home to pay off the mortgage, some borrowers may want to pay off their mortgage earlier to save on interest. Outlined below are a few strategies that can be employed to pay off the mortgage early.:

### Extra Payments

Extra payments are additional payments in addition to the scheduled mortgage payments. Borrowers can make these payments on a one-time basis or over a specified period, such as monthly or annually.

Extra payments can possibly lower overall interest costs dramatically. For example, a one-time additional payment of $1,000 towards a $200,000, 30-year loan at 5% interest can pay off the loan four months earlier, saving $3,420 in interest. For the same $200,000, 30-year, 5% interest loan, extra monthly payments of $6 will pay off the loan four payments earlier, saving $2,796 in interest.

### Biweekly Payments

Another strategy for paying off the mortgage earlier involves biweekly payments. This entails paying half of the regular mortgage payment every two weeks. With 52 weeks in a year, this approach results in 26 half payments. Thus, borrowers make the equivalent of 13 full monthly payments at year's end, or one extra month of payments every year. The biweekly payments option is suitable for those that receive a paycheck every two weeks. In such cases, borrowers can allocate a certain amount from each paycheck for the mortgage repayment.

### Refinance to a shorter term

Another option involves refinancing, or taking out a new mortgage to pay off an old loan. For example, a borrower holds a mortgage at a 5% interest rate with $200,000 and 20 years remaining. If this borrower can refinance to a new 20-year loan with the same principal at a 4% interest rate, the monthly payment will drop $107.95 from $1,319.91 to $1,211.96 per month. The total savings in interest will come out to $25,908.20 over the lifetime of the loan.

Borrowers can refinance to a shorter or longer term. Shorter-term loans often include lower interest rates. However, they will usually need to pay closing costs and fees to refinance. Borrowers should run a compressive evaluation to decide if refinancing is financially beneficial. To evaluate refinancing options, visit our Refinance Calculator.

### Prepayment Penalties

Some lenders may charge a prepayment penalty if the borrower pays the loan off early. From a lender's perspective, mortgages are profitable investments that bring years of income, and the last thing they want to see is their money-making machines compromised.

Lenders use numerous methods to calculate prepayment penalties. Possible penalties include charging 80% of the interest the lender would collect over the next six months. A lender may also add on a percentage of the outstanding balance. These penalties can amount to massive fees, especially during the early stages of a mortgage.

However, prepayment penalties have become less common. If the lender includes these possible fees in a mortgage document, they usually become void after a certain period, such as after the fifth year. Borrowers should read the fine print or ask the lender to gain a clear understanding of how prepayment penalties apply to their loan. FHA loans, VA loans, or any loans insured by federally chartered credit unions prohibit prepayment penalties.

### Opportunity Costs

Borrowers that want to pay off their mortgage earlier should consider the opportunity costs, or the benefits they could have enjoyed if they had chosen an alternative. Financial opportunity costs exist for every dollar spent for a specific purpose.

The home mortgage is a type of loan with a relatively low interest rate, and many see mortgage prepayments as the equivalent of low-risk, low-reward investment. For this reason, borrowers should consider paying off high-interest obligations such as credit cards or smaller debts such as student or auto loans before supplementing a mortgage with extra payments.

Additionally, other investments can produce returns exceeding the rate of mortgage interest. Nobody can predict the market's future direction, but some of these alternative investments may result in higher returns than the savings that would come from paying off a mortgage. In the long run, it would make more financial sense for an individual to have placed a certain amount of money into a portfolio of stocks that earned 10% one year as opposed to their existing mortgage at a 4% interest rate. Corporate bonds, physical gold, and many other investments are options that mortgage holders might consider instead of extra payments.

Additionally, since most borrowers also need to save for retirement, they should also consider contributing to tax-advantaged accounts such as an IRA, a Roth IRA, or a 401k before making extra mortgage payments. This way, they not only may enjoy higher returns but also benefit from significant tax savings.

### Examples

In the end, it is up to individuals to evaluate their unique situations to determine whether it makes the most financial sense to increase monthly payments towards their mortgage. The following is a few examples:

**Example 1:** Christine wanted the sense of happiness that comes with outright ownership of a beautiful home. After confirming she would not face prepayment penalties, she decided to supplement her mortgage with extra payments to speed up the payoff.

One day, Christine had lunch with a friend who works as a financial advisor. Her friend explained that she could eliminate more interest charges by paying the existing high-interest debt on her three credit cards. Some of the cards charged rates as high as 20%, while the mortgage only charged a 5% interest rate. These payments ate up an unnecessarily large amount of her income. By paying off these high-interest debts first, Christine reduces her interest costs more quickly.

**Example 2:** Bob holds no debt except the mortgage on his family's home. Student loans, car loans, and credit card loans are all a thing of the past. With his discretionary income, he cannot decide whether to make supplemental payments towards his mortgage or invest in the stock market. Over time, the market has generated higher returns than the 4% interest rate tied to his mortgage.

Bob could also choose to put more away into his emergency fund, which is nearly empty. One crucial detail his financial advisor mentioned is that Bob's company has been laying off employees recently. His manager even warned Bob that he might be next in line.

In this situation, Bob should build an emergency fund before investing in the market or making supplemental mortgage payments.

**Example 3:** Charles carries no debt other than the mortgage on his house. He has a steady job where he has maxed out his tax-advantaged accounts, built a healthy six-month emergency fund, and saved extra cash. Charles is a few years away from retirement. Therefore, he does not want to make relatively riskier investments, such as purchasing individual stocks. In this situation, Charles's financial advisor recommends paying off his mortgage earlier to save on mortgage interest. This way, he can begin his retirement with a fully paid-off home.

## How To Calculate Your Mortgage Payment: Fixed, Variable, and More

Understanding your mortgage helps you make better financial decisions. Instead of just accepting offers blindly, it’s wise to look at the numbers behind any loan—especially a significant loan like a home loan.

### Key Takeaways

- You can calculate your monthly mortgage payment by using a mortgage calculator or doing it by hand.
- You'll need to gather information about the mortgage's principal and interest rate, the length of the loan, and more.
- Before you apply for loans, review your income and determine how much you’re comfortable spending on a mortgage payment.

### Getting Started With Calculating Your Mortgage

People tend to focus on the monthly payment, but there are other important features that you can use to analyze your mortgage, such as:

- Comparing the monthly payment for several different home loans
- Figuring how much you pay in interest monthly, and over the life of the loan
- Tallying how much you actually pay off over the life of the loan, versus the principal borrowed, to see how much you actually paid extra

Use the mortgage calculator below to get a sense of what your monthly mortgage payment could end up being,

### The Inputs

Start by gathering the information needed to calculate your payments and understand other aspects of the loan. You need the details below. The letter in parentheses tells you where we’ll use these items in calculations (if you choose to calculate this yourself, but you can also use online calculators):

- The
**loan amount**(P) or principal, which is the home-purchase price plus any other charges, minus the down payment - The annual
**interest rate**(r) on the loan, but beware that this is not necessarily the APR, because the mortgage is paid monthly, not annually, and that creates a slight difference between the APR and the interest rate - The
**number of years**(t) you have to repay, also known as the "term" - The number of
**payments per year**(n), which would be 12 for monthly payments - The
**type of loan**: For example, fixed-rate, interest-only, adjustable - The
**market value**of the home - Your
**monthly income**

### Calculations for Different Loans

The calculation you use depends on the type of loan you have. Most home loans are standard fixed-rate loans. For example, standard 30-year or 15-year mortgages keep the same interest rate and monthly payment for their duration.

For these fixed loans, use the formula below to calculate the payment. Note that the carat (^) indicates that you’re raising a number to the power indicated after the carat.

**Payment = P x (r / n) x (1 + r / n)^n(t)] / (1 + r / n)^n(t) - 1**

### Example of Payment Calculation

Suppose you borrow $100,000 at 6% for 30 years, to be repaid monthly. What is the monthly payment? The monthly payment is $599.55.

Plug those numbers into the payment formula:

- {100,000 x (.06 / 12) x [1 + (.06 / 12)^12(30)]} / {[1 + (.06 / 12)^12(30)] - 1}
- (100,000 x .005 x 6.022575) / 5.022575
- 3011.288 / 5.022575 = 599.55

You can check your math with the Loan Amortization Calculator spreadsheet.

### How Much Interest Do You Pay?

Your mortgage payment is important, but you also need to know how much of it gets applied to interest each month. A portion of each monthly payment goes toward your interest cost, and the remainder pays down your loan balance. Note that you might also have taxes and insurance included in your monthly payment, but those are separate from your loan calculations.

An amortization table can show you—month-by-month—exactly what happens with each payment. You can create amortization tables by hand, or use a free online calculator and spreadsheet to do the job for you. Take a look at how much total interest you pay over the life of your loan. With that information, you can decide whether you want to save money by:

- Borrowing less (by choosing a less expensive home or making a larger down payment)
- Paying extra each month
- Finding a lower interest rate
- Choosing a shorter-term loan (15 years instead of 30 years, for example) to speed up your debt repayment

Shorter-term loans like 15-year mortgages often have lower rates than 30-year loans. Although you would have a bigger monthly payment with a 15-year mortgage, you would spend less on interest.

### Interest-Only Loan Payment Calculation Formula

Interest-only loans are much easier to calculate. Unfortunately, you don’t pay down the loan with each required payment, but you can typically pay extra each month if you want to reduce your debt.

*Example:* Suppose you borrow $100,000 at 6% using an interest-only loan with monthly payments. What is the payment? The payment is $500.

Loan Payment = Amount x (Interest Rate / 12)

**Loan payment = $100,000 x (.06 / 12) = $500**

Check your math with the Interest Only Calculator on Google Sheets.

In the example above, the interest-only payment is $500, and it will remain the same until:

- You make additional payments, above and beyond the required minimum payment. Doing so will reduce your loan balance, but your required payment might not change right away.
- After a certain number of years, you’re required to start making amortizing payments to pay down the debt.
- Your loan may require a balloon payment to pay off the loan entirely.

### Adjustable-Rate Mortgage Payment Calculation

Adjustable-rate mortgages (ARMs) feature interest rates that can change, resulting in a new monthly payment. To calculate that payment:

- Determine how many months or payments are left.
- Create a new amortization schedule for the length of time remaining (see how to do that).
- Use the outstanding loan balance as the new loan amount.
- Enter the new (or future) interest rate.

*Example:* You have a hybrid-ARM loan balance of $100,000, and there are ten years left on the loan. Your interest rate is about to adjust to 5%. What will the monthly payment be? The payment will be $1,060.66.

### Know How Much You Own (Equity)

It’s crucial to understand how much of your home you actually own. Of course, you own the home—but until it’s paid off, your lender has a lien on the property, so it’s not yours free-and-clear. The value that you own, known as your "home equity," is the home’s market value minus any outstanding loan balance.

You might want to calculate your equity for several reasons.

**Your loan-to-value (LTV) ratio**is critical, because lenders look for a minimum ratio before approving loans. If you want to refinance or figure out how big your down payment needs to be on your next home, you need to know the LTV ratio.**Your net worth**is based on how much of your home you actually own. Having a one million-dollar home doesn’t do you much good if you owe $999,000 on the property.**You can borrow against your home**using second mortgages and home equity lines of credit (HELOCs). Lenders often prefer an LTV below 80% to approve a loan, but some lenders go higher.

### Can You Afford the Loan?

Lenders tend to offer you the largest loan that they’ll approve you for by using their standards for an acceptable debt-to-income ratio. However, you don’t need to take the full amount—and it’s often a good idea to borrow less than the maximum available.

Before you apply for loans or visit houses, review your income and your typical monthly expenses to determine how much you’re comfortable spending on a mortgage payment. Once you know that number, you can start talking to lenders and looking at debt-to-income ratios. If you do it the other way around (ignoring your expenses and basing your housing payment solely on your income), you might start shopping for more expensive homes than you can afford, which affects your lifestyle and leaves you vulnerable to surprises.

It’s safest to buy less and enjoy some wiggle room each month. Struggling to keep up with payments is stressful and risky, and it prevents you from saving for other goals.

### Frequently Asked Questions (FAQs)

### What is a fixed-rate mortgage?

A fixed-rate mortgage is a home loan that has the same interest rate for the life of the loan. This means your monthly principal and interest payment will stay the same. The proportion of how much of your payment goes toward interest and principal will change each month due to amortization. Each month, a little more of your payment goes toward principal and a little less goes toward interest.

### What is an interest-only mortgage?

An interest-only mortgage is a home loan that allows you to only pay the interest for the first several years you have the mortgage. After that period, you'll need to pay principal and interest, which means your payments will be significantly higher. You can make principal payments during the interest-only period, but you're not required to.

## Mortgage Calculator

### Mortgage options and terminology

In addition to mortgages options (loan types), consider some of these program differences and mortgage terminology.

### Loan term

A mortgage loan term is the maximum length of time you have to repay the loan. Common mortgage terms are 30-year or 15-year. Longer terms usually have higher rates but lower monthly payments. Shorter terms help pay off loans quickly, saving on interest. It is possible to pay down your loan faster than the set term by making additional monthly payments toward your principal loan balance.

### Fixed rate vs adjustable rate

A fixed rate is when your interest rate remains the same for your entire loan term. An adjustable rate stays the same for a predetermined length of time and then resets to a new interest rate on scheduled intervals. A 5-year ARM, for instance, offers a fixed interest rate for 5 years and then adjusts each year for the remaining length of the loan. Typically the first fixed period offers a low rate, making it beneficial if you plan to refinance or move before the first rate adjustment.

### Conforming loans vs non-conforming loans

Conforming loans have maximum loan amounts that are set by the government and conform to other rules set by Fannie Mae or Freddie Mac, the companies that provide backing for conforming loans. A non-conforming loan is less standardized with eligibility and pricing varying widely by lender. Non-conforming loans are not limited to the size limit of conforming loans, like a jumbo loan, or the guidelines like government-backed loans, although lenders will have their own criteria.

### Start your home buying research with a mortgage calculator

A mortgage payment calculator is a powerful real estate tool that can help you do more than just estimate your monthly payments. Here are some additional ways to use our mortgage calculator:

1

### Assess down payment scenarios

Adjust your down payment size to see how much it affects your monthly payment. For instance, would it be better to have more in savings after purchasing the home? Can you avoid PMI? Compare realistic monthly payments, beyond just principal and interest.

2

### Calculate mortgage rates

Modify the interest rate to evaluate the impact of seemingly minor rate changes. Knowing that rates can change daily, consider the impact of waiting to improve your credit score in exchange for possibly qualifying for a lower interest rate. Click the "Schedule" for an interactive graph showing the estimated timeframe of paying off your interest, similar to our amortization calculator.

3

### Evaluate affordability

Fine-tune your inputs to assess your readiness. Use our affordability calculator to dig deeper into income, debts and payments.

4

### Sample loan programs

Adjust the loan program to see how each changes monthly mortgage payments

### Frequently asked questions about mortgages

The principal of a loan is the remaining balance of the money you borrowed. Principal does not include interest, which is the cost of the loan.

The down payment is the money you pay upfront to purchase a home. The down payment plus the loan amount should add up to the cost of the home.

Interest rate is the base fee for borrowing money, while the annual percentage rate (APR) is the interest rate plus the lender fees. APR gives you an accurate idea of the cost of a financing offer, highlighting the relationship between rate and fees.

Closing costs for a home buyer are typically 2% to 5% of the purchase price of the home. Depending on loan type, these costs may roll into the mortgage payment or be paid at closing. Agent commission is traditionally paid by the seller.

The cost of private mortgage insurance varies based on factors such as credit score, down payment and loan type.

You should consult with your insurance carrier, but the general thought is that homeowner's insurance costs roughly $35 per month for every $100,000 of the home value.

**>Related:**How to buy a house with $0 down: First-time home buyer

### How to use this mortgage calculator

This mortgage payment calculator will help you find the cost of homeownership at today’s mortgage rates, accounting for principal, interest, taxes, homeowners insurance, and, where applicable, homeowners association fees.

You should adjust the default values of the mortgage calculator, including mortgage rate and length of loan, to reflect your current situation.

You can use the mortgage payment calculator in three ways:

- To find the monthly mortgage payment on a home, given current mortgage rates and a specific home purchase price
- To find out how much house you can afford based on your annual household income
- To find out how much house you can afford based on your monthly budget

### Do I qualify for a mortgage?

A mortgage calculator can be helpful when estimating your home buying budget. But remember — even if you can afford the monthly payments, you still need to qualify for a home loan.

To see if you qualify for a mortgage, a lender will check your:

**Credit score**: Borrowers with higher credit scores tend to have more loan options. But mortgages are secured loans, which means you don’t always need stellar credit to qualify. Some lenders can approve FHA loans for borrowers with FICO scores as low as 580**Loan-to-value ratio (LTV)**: LTV measures your loan amount against your new home’s value. For example, borrowing $200,000 to buy a $200,000 home equals 100% LTV. Lenders can offer VA or USDA loans at 100% LTV, but not everyone is eligible for these programs. FHA loans can’t exceed 96.5% LTV, which leaves 3.5% as the minimum down payment. Conventional loans can reach 97% LTV, meaning they allow a 3% down payment**Home appraisal**: A home appraisal identifies the home’s value. Lenders won’t approve loan amounts that exceed the home’s value, regardless of the home’s listing price or agreed-upon purchase price**Personal finances**: Lenders must verify your income to make sure you can afford the loan payments. They’ll check W-2s, bank statements, and employment records. If you’re self-employed, a lender will likely ask to see tax records

You can ask for a mortgage pre-approval or a prequalification to see your loan options and ‘real’ budget based on your personal finances.

You could also track your credit score using free apps, but remember that the scores in free apps tend to be estimates. They often come in higher than your actual FICO. Only a lender can tell you for sure whether you’re mortgage eligible.

### Mortgage calculator definitions

Buying a home involves more than just a down payment. Your total mortgage costs include repaying the home loan with principal and interest, plus paying for monthly fees like property taxes and home insurance.

As you experiment with the mortgage calculator, be sure you understand each term so you can enter accurate data and get precise answers.

### Home price

Home price is the dollar amount needed to buy the home. Your home price may turn out to be the different from the listing price once you and the seller have finished negotiations and put the final price down in a purchase contract.

### Interest rate

Your interest rate determines how much money you will repay the bank for your mortgage. Though paid monthly, interest rates are expressed in annual terms.

- With a fixed-rate mortgage, your mortgage interest rate will remain unchanged for the life of the loan. This means your monthly payments will stay the same, too
- With an adjustable-rate mortgage, your interest rate may change after a fixed number of years. If your interest rate adjusts, so will your mortgage payments

When using this home mortgage calculator, you can use today’s average mortgage rate for “interest rate.” Lower interest rates mean you’re paying less each month *and* over the life of the loan.

### Length of the loan

Sometimes known as “loan term,” the length of the loan is the number of years until your home loan is paid in-full. Most mortgages have a loan term of 30 years. Since 2010, 20-year and 15-year fixed rate mortgages have grown more common.

The monthly cost of a mortgage is higher with a shorter-term loan, but less mortgage interest is paid over time. Homeowners with a 15-year mortgage will pay approximately 65% less mortgage interest as compared to a homeowner with a 30-year loan.

However, a shorter mortgage term requires higher monthly payments since the total amount repaid is spread across a shorter length of time.

### Down payment

A down payment is the amount of your own money you pay upfront to buy a new home. Your down payment, combined with the loan amount, will cover the entire purchase price.

A down payment can become immediate equity. For example, if you are buying a home for $100,000 and you make a $5,000 down payment, you will own $5,000 equity (5%) in your new home even before making the first monthly payment.

Some mortgage programs, such as the conventional 97 and FHA loans, allow low down payments of 3-3.5%. Others, including the VA loan and USDA loan, require no down payment whatsoever.

Keep in mind, your down payment amount is not the only cash required at closing. You should be sure to budget for closing costs and other upfront items as well.

Most areas have down payment assistance programs to help borrowers come up with the cash to purchase their own homes. Conventional and FHA loans allow borrowers to use down payment money given by a close friend or relative.

### Homeowners insurance

Homeowners insurance protects your home against minor, major, and catastrophic loss. All homeowners are required to carry this protection, which is sometimes called “hazard insurance.”

Laws vary by state but, as a general rule, your homeowners insurance policy must be big enough to cover the cost of rebuilding your home as-is. Homeowners insurance costs vary by ZIP code and insurer.

Homeowners insurance should not be confused with private mortgage insurance, which is something else entirely.

Along with property taxes, homeowners insurance can be paid in equal installments along with your monthly mortgage payment. This arrangement is known as “escrowing” your taxes and insurance.

### Property taxes

Property taxes are taxes assessed on a home, and paid to your state, city, and/or local government(s). Property taxes can range in cost from 0.5% of your home’s value, to 2% of its value or more on an annual basis.

Sometimes called “real estate taxes,” property taxes are typically billed twice annually. Along with homeowners insurance, property taxes can be paid in equal installments along with your monthly mortgage payment. This arrangement is known as “escrowing” your taxes and insurance.

### Escrow account

‘Escrow‘ isn’t a term isn’t on the calculator, but it’ll appear in more than one phase of your home buying process.

Before you close, an escrow company will shuttle money between different parties.

For example, your earnest money — which tells the buyer you’re making a genuine offer — will likely go into escrow. It will be held there until closing, at which time it’s applied to your down payment.

After you close, your mortgage loan servicer will deposit part of your total monthly payment into another escrow account.

With each payment, this account’s balance will grow. When your property tax or home insurance bills come due, the lender will pay them out of escrow.

If you’d like to know how every dollar of your total monthly payment gets allocated, ask your loan officer for a payment breakdown.

### Homeowners Association (HOA) dues

Homeowners Association dues (also called HOA fees) are typically paid by condominium owners and homeowners in a planned urban development (PUD) or townhome.

HOA dues are paid monthly, semi-annually, or annually. They are paid separately to a management company or governing body for the association.

HOA fees cover common services for tenants and residents. These services may include landscaping, elevator maintenance, maintenance and upkeep of common areas such as pools and recreation areas, and legal costs.

Homeowners association dues vary by building and neighborhood.

### Mortgage insurance (PMI)

Mortgage insurance is a monthly fee paid by the homeowner for the benefit of the lender.

Mortgage insurance “pays out” when a loan goes into default, and it’s designed to protect mortgage lenders from taking losses on defaulted loans.

Mortgage insurance is required for conventional loans via Fannie Mae and Freddie Mac when the down payment is less than 20%. This type of mortgage insurance is known as private mortgage insurance (PMI).

Other loan types require mortgage insurance, too, including USDA loans and FHA loans. With FHA loans, mortgage insurance is called mortgage insurance premium (MIP).

Conventional PMI will be canceled once the homeowner has at least 20% equity. FHA mortgage insurance typically lasts the life of the loan, unless the buyer makes a down payment of 10% or more.

### Annual income

Annual income is the amount of documented income you earn each year. Income can be earned in many forms including W-2 income, 1099 income, K-1 distributions, Social Security income, pension income, and child support and alimony.

Non-reported income cannot be used for qualifying purposes on a mortgage. When using the home loan calculator, enter your pre-tax income.

### Monthly debts

Monthly debts are your recurring payments, due monthly. Monthly debts may include auto leases, auto loans, student loans, child support and alimony payments, installment loans, and credit card payments.

Note, though, that your monthly obligation on a credit card is its minimum payment due and *not *your total balance owed. For credit cards with no minimum payment due, use 5% of your balance owed as your minimum payment due.

### Debt-To-Income ratio

Debt-to-Income Ratio (DTI) is a lender term used to determine home affordability. The ratio is determined by dividing the sum of your monthly debts by your verifiable monthly income.

In general, mortgage approvals require a debt-to-income of 45% or less, although lenders will sometimes allow for an exception.

Note that carrying a DTI of 45% may not be advisable. A high DTI commits much of your household income to housing payments.

### Monthly payment

Your total monthly payment is your monthly obligation on your home. This includes your mortgage payment, property taxes, and home insurance — plus homeowners association dues (HOA) — where applicable.

Your monthly payment will change over time as its components change. Your real estate tax bill will change annually, as will the premium on your homeowners insurance policy, for example.

Homeowners with an adjustable-rate mortgage can expect their mortgage payment to change, too, after the loan’s initial fixed period ends.

### Amortization

Amortization is the schedule by which a mortgage loan is repaid to a bank. Amortization schedules vary by loan term. A 30-year mortgage will repay at a different pace than a 15-year or 20-year mortgage.

Early in the repayment period, your monthly loan payments will include more interest. As time passes, each month’s payment will include a little more principal and a little less interest.

By the end of the repayment period, you’re paying mostly loan principal and very little interest.

### Principal

Your loan principal is the amount borrowed from the bank. A portion of the principal is repaid to the bank each month as part of the overall mortgage payment.

The percentage of principal in each payment increases monthly until the loan is paid in full, which may be in 15 years, 20 years, or 30 years.

Paying principal each month increases your home equity, assuming your home’s value is unchanged. If your home’s value drops, your equity percentage will decrease in spite of reducing your loan’s balance.

Similarly, if your home’s value rises, your equity percentage will increase by an amount greater than what you’ve paid in principal.

### Interest

Interest is the money you pay the bank for the privilege of using the lender’s money to buy your home. Interest is paid monthly until the loan is paid off in full.

The portion of interest paid to the bank each month decreases according to your loan’s amortization schedule. Your mortgage interest paid over the life of your loan is based on your loan term and your mortgage interest rate.

### Loan estimate

Federal law requires mortgage lenders to show you a three-page ‘Loan Estimate’ after you apply for a mortgage loan.

The Loan Estimate (LE) shows your total mortgage costs — including the down payment, closing costs, monthly payments, and interest paid over the life of the loan.

All LEs are in a standard format, making it easy for you to compare loan offers side by side and find the best deal.

The loan calculator above can also estimate your long-term interest costs. Click the “view full report” button to see the estimate.

### Check your mortgage eligibility

Using a mortgage calculator is a good way to get an idea of how much house you can afford. But only a lender can verify your mortgage eligibility and your home buying budget.

Check today’s rates to see what you might qualify for and how much house you can truly afford.

Verify your new rate (Dec 5th, 2021)

## Mortgage Interest Calculator Canada

When you make a mortgage payment, you are paying towards both your principal and interest. Your regular mortgage payments will stay the same for the entire length of your term, but the portions that go towards your principal balance or the interest will change over time.

As your principal payments lower your principal balance, your mortgage will become smaller and smaller over time. A smaller principal balance will result in less interest being charged. However, since your monthly mortgage payment stays the same, this means that the amount being paid towards your principal will become larger and larger over time. This is why your initial monthly payment will have a larger proportion going towards interest compared to the interest payment near the end of your mortgage term.

This behaviour can change depending on your mortgage type. Fixed-rate mortgages have an interest rate that does not change. Your principal will be paid off at an increasingly faster rate as your term progresses.

On the other hand, variable-rate mortgages have a mortgage interest rate that can change. While the monthly mortgage payment for a variable-rate mortgage does not change, the portion going towards interest will change. If interest rates rise, more of your mortgage payment will go towards interest. This will reduce the amount of principal that is being paid. This will cause your mortgage to be paid off slower than scheduled. If rates decrease, your mortgage will be paid off faster.

### What is a Mortgage Principal?

A principal is the original amount of a loan or investment. Interest is then charged on the principal for a loan, while an investor might earn money based on the principal that they invested. When looking at mortgages, the mortgage principal is the amount of money that you owe and will need to pay back. For example, perhaps you bought a home for $500,000 after closing costs and made a down payment of $100,000. You will only need to borrow $400,000 from a bank or mortgage lender in order to finance the purchase of the home. This means that when you get a mortgage and borrow $400,000, your mortgage principal will be $400,000.

Your mortgage principal balance is the amount that you still owe and will need to pay back. As you make mortgage payments, your principal balance will decrease. The amount of interest that you pay will depend on your principal balance. A higher principal balance means that you’ll be paying more mortgage interest compared to a lower principal balance, assuming the mortgage interest rate is the same.

### What is Mortgage Interest?

Interest is charged by lenders in exchange for allowing you to borrow money. For borrowers, mortgage interest is charged based on your mortgage principal balance. The mortgage interest charged is included in your regular mortgage payments. This means that with every mortgage payment, you will be paying both your mortgage principal and your mortgage interest.

Your regular mortgage payment amount is set by your lender so that you’ll be able to pay off your mortgage on time based on your selected amortization period. This is why your mortgage payment amount can change when you renew your mortgage or refinance your mortgage. This can change your mortgage rate, which will impact the amount of mortgage interest due. If you now have a higher mortgage rate, your mortgage payment will be higher to account for the higher interest charges. If you’re borrowing a larger amount of money, your mortgage payment may also be higher due to interest being charged on a larger principal balance.

However, mortgage interest isn’t the only cost that you’ll need to pay. Your mortgage might have other costs and fees, such as set-up fees or appraisal fees, that are necessary to get your mortgage. Since you’ll need to pay these extra costs in order to borrow money, they can increase the actual cost of your mortgage. That’s why it can be a better idea to compare lenders based on their annual percentage rate (APR). A mortgage’s APR reflects the true cost of borrowing for your mortgage.

### Mortgage Interest Compounding in Canada

Mortgage interest in Canada is compounded semi-annually. This means that while you might be making monthly mortgage payments, your mortgage interest will only be compounded twice a year. Semi-annual compounding saves you money compared to monthly compounding. That’s because interest will be charged on top of your interest less often, giving interest less room to grow.

To see how this works, let’s first look at credit cards. Not all credit cards in Canada charge compound interest, but for those that do, they usually are compounded monthly. The unpaid interest is added to the credit card balance, which will then be charged interest if it continues to be unpaid. For example, you purchased an item for $1,000 and charged it to your credit card which has an interest rate of 20%. You decide not to pay it off and make no payments. To simplify, assume that there is no minimum required payment.

To calculate the interest charged, you’ll need to find the daily interest rate. 20% divided by 365 days gives a daily interest rate of 0.0548%. For a 30-day period, you’ll be charged $16.44 interest. Interest is calculated daily but only added once a month. Since you’re not making any payments and are still carrying a balance, your credit card balance for the following month will be $1016.44. As the interest is added to your balance, this means that interest is being charged on top of your existing interest charges. For another 30-day period, you’ll be charged $16.71 interest, which now makes your credit card balance $1,033.15.

The same applies to mortgages, but instead of monthly compounding, the compounding period for mortgages in Canada is semi-annually. Instead of adding unpaid interest to your balance every month like a credit card, a mortgage lender is limited to adding unpaid interest to your mortgage balance twice a year. In other words, this affects your actual interest rate based on the interest being charged.

### Mortgage Effective Annual Rate Formula (EAR)

To account for semi-annual compounding, you can calculate your mortgage’s effective annual rate (EAR). The number of compounding periods in a year is two. To use the effective annual rate formula below, convert your interest rate from a percent into decimals.

^{2}- 1

For example, if your mortgage lender quotes a mortgage rate of 3%, then your effective annual rate will be:

^{2}- 1 = 0.030225 = 3.0225%

If your mortgage lender quotes a mortgage rate of 5%, then your effective annual rate will be:

^{2}- 1 = 0.050625 = 5.0625%

This calculation assumes that interest will be compounded semi-annually, which is the law for mortgages in Canada. For a more general formula for EAR:

^{n}- 1

Where “n” is the number of compounding periods in a year. For example, if interest is being compounded monthly, then “n” will be 12. If interest is only compounded once a year, then “n” will be 1.

### How to calculate mortgage interest

To calculate interest paid on a mortgage, you will first need to know your mortgage balance, the amount of your monthly mortgage payment, and your mortgage interest rate. For example, you might want to calculate mortgage interest for a mortgage of $500,000 with monthly payments of $2,500 at a 3% mortgage rate .

To find how much interest is paid on your initial monthly mortgage payment, you just need to apply the interest rate against your mortgage balance as a monthly rate. Applying the 3% mortgage rate to the mortgage balance, you will get an annual interest amount of $15,000. You then divide this by 12 to get your monthly interest amount, which would be $1,250. As your monthly payment is $2,500, the remaining amount of $1,250 will go towards your principal.

To calculate mortgage interest paid for the second month, you first need to recalculate your mortgage balance. Since you paid $1,250 towards your principal in the first month, your new mortgage balance is $498,750. The interest paid will be 3% of $498,750 divided by 12 to get a monthly rate. You will get $1,246.87, which is the interest paid in the second month. Your principal payment will be the remaining out of the $2,500 payment, which would be $1,253.13.

Notice how your interest payment is slightly lower while your principal payment is now slightly higher. You paid $3.13 less interest in the second month compared to the first month, and you paid $3.13 more towards your principal in the second month compared to the first month.

You will now repeat the same steps until your mortgage is fully paid off. A way to easily organize and calculate this is to create an amortization schedule. You can use the mortgage interest calculator above to calculate your total interest and principal payments, and also to create a downloadable amortization schedule.

### Bi-Weekly vs Monthly Mortgage Payments

Bi-weekly mortgage payments means that you make mortgage payments every two weeks. Since the time between payments is reduced, the effect of lower mortgage balances and resulting lower interest can build up faster. Bi-weekly payments also mean that you will make more mortgage payments in a year.

There are 12 months in a year, which will result in only 12 mortgage payments if you were to make monthly payments. There are 52 weeks in a year, which will result in 26 bi-weekly mortgage payments. This creates an additional 2 bi-weekly mortgage payments, or the equivalent of an extra monthly mortgage payment, every year.

Making more mortgage payments with bi-weekly mortgage payments will allow you to make more payments, resulting in your mortgage being paid off sooner. Choosing bi-weekly payments can let you pay off your mortgage a few years earlier, while also saving you in mortgage interest.

### How Does Amortization Affect Mortgage Interest?

Your amortization period is the length of time that it will take for you to pay off your mortgage fully if you only make your required regularly scheduled mortgage payments. The longer you owe money, the more time there is for interest to be charged. That’s why a longer amortization period will result in a higher total interest paid compared to a shorter amortization period. On the other hand, a shorter amortization requires larger mortgage payments in order to pay off the mortgage faster. While this will save you money, you will need to be able to afford these larger payments.

In Canada, the most common amortization period is 25 years. Coincidently, it’s also the maximum amortization limit allowed for insured mortgages, such as mortgages that have CMHC insurance. However, you can always choose to have a shorter or longer amortization period. How will your amortization affect your mortgage interest?

Let’s take a look at a mortgage with a principal balance of $500,000 and a fixed mortgage rate of 2.50%. We will compare 15-year, 20-year, 25-year, and 30-year amortizations to see how much interest you will have to pay over the lifetime of your mortgage loan.

If you chose a 20-year amortization instead of 25-years, you will need to pay an extra $406 every month but you will save $37,042 in interest over 20 years. If you paid an extra $1,091 every month for a 15-year amortization, you’ll save a total of $72,815 in interest. If you want to lower your mortgage payments and choose to get a 30-year amortization instead, you’ll save $268 per month through lower payments but end up paying $38,293 more in interest.

The interest vs. principal ratio also gives us a look at how each option compares. With a 30-year amortization, you’ll be paying 42.2% on your mortgage balance in interest. Choosing a 15-year amortization can slash this ratio in more than half, to just 20%. Of course, the above calculations assume that you will not be making any extra payments and that your mortgage rate is fixed at 2.50%. The numbers will change depending on your actual interest rates, but the positions of each option will not.

### Breakdown of Mortgage Payments

It’s important to understand your mortgage payment structure so that you can find ways to save money. Let's take a look at mortgage payments and their payment breakdowns.

Your mortgage principal balance and your mortgage interest will change during your mortgage term, but something that doesn't change is your monthly payment amount. Your selected amortization period determines your monthly payment amount which will be fixed for the duration of your term. When you first get a mortgage, most of your monthly payment will go towards interest. You haven’t had time to pay down your mortgage balance yet, and so when interest is charged, you’ll need to pay interest on a higher mortgage balance.

As time passes by and your balance decreases, there is less balance remaining for interest to be charged. This reduces the proportion of interest charged compared to your monthly payment. The amount remaining can then go towards paying down your mortgage balance further. This is similar to compound interest but in reverse.

- Mortgage Principal Balance: $500,000
- Mortgage Rate: 2.50% fixed for the entire amortization

15 Year | 20 Year | 25 Year | 30 Year | |
---|---|---|---|---|

Monthly Mortgage Payment | $3,334 | $2,649 | $2,243 | $1,975 |

Monthly Payment Difference(Compared to 25 Year) | +$1,091 | +$406 | - | -$268 |

Total Interest Cost(Until Mortgage Is Fully Paid Off) | $100,110 | $135,883 | $172,925 | $211,218 |

Total Interest Cost Difference(Compared to 25 Year) | -$72,815 | -$37,042 | - | +$38,293 |

Interest vs Principal Ratio | 20.0% | 27.2% | 34.6% | 42.2% |

This is one reason why making mortgage prepayments is so important if you want to save money. Banks and mortgage lenders usually allow you to make mortgage prepayments up to a certain limit every year for closed mortgages. For example, RBC lets you make prepayments up to 10% of your principal every year, while the limit with TD is 15%. You can make prepayments without prepayment penalties if you stay under their annual limits.

Mortgage prepayments are payments that go directly towards paying down your principal balance. Making prepayments can also allow you to pay off your mortgage ahead of schedule. This saves you money and makes you one step closer to becoming mortgage-free.

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