What are the Concepts behind Mortgage Calculations?

Acquiring a home loan could be a choice the moment you establish a conclusion of refinancing or owning a brand-new house. Needing to pay the loaned resources over its time period, it is possible to acquire a loan that requires both principal and interest payment and that’s typically known to as Direct Reduction Loan. It indicates that part of your payment will instantly decrease the particular principal.

Fixed Interest Rate Loan

As an illustration, you acquire a mortgage loan with a total amount of $200,000. It is due for 30 years with an interest rate of 5%. For this transaction, you will now have to pay a monthly payment of $1,073.64. This process applies in a Fixed Interest Rate Loan. It also means that the rate charges for this type of mortgage will remain fixed until the entire loan is fully settled.

The sum of $1,073.64 is intended for both principal and interest rate costs. It is allocated for the interest considering the amount of $833.33 and 240.31 for the reduction of the principal amount respectively. The remainder of 240.31 is subtracted from the principal amounted to $200,000 which ends for an outstanding balance of $199,759.69. This calculation does apply for your mortgage of $200,000 which is payable for thirty years plus an interest rate of 5%.

Considering your second month’s payment, the amount of $832.33 is for the interest while your principal reduction would already cost the amount of $241.31. At the end of the second month your current principal balance becomes $199,518.38.

For further knowledge, let’s also compute the third month. Your fixed payment per month is $1,073.64. Your interest would be $831.33 while the principal reduction would be $242.31. Now subtract the remainder from your latest outstanding principal balance and the result would now be $199,276.07.

The monthly interest payment is based on the formula of the previous outstanding balance. As you can see, the interest allotted to your payment is reducing while the reduction of the principal is increasing. On the other hand, you can also notice that the outstanding balance reduces each month. The impact would also be decreasing on the part of the monthly interest cost. Therefore, since your monthly payment is fixed and nothing is modified, the following month’s cost will be invested in the principal amount of the loan.

How to Do Mortgage Loan Calculations with a Simple Mortgage Calculator

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The benefit of having charges that do not change for the entire term is what a fixed mortgage rate generally offer. This approach also gives you an advantage because you know exactly how much you are going to commit monthly. Let’s say you borrowed an amount of $200,000. Your term is 30 years with interest rate of 5% annually. This arrangement will now give you a monthly payment of $1,073.64.

The breakdown of your mortgage payment would change every month. Your mortgage payment is composed of a principal part (which is the settlement of the amount borrowed) plus the interest portion on the balance of the loan that remains outstanding. Considering that the amount outstanding on your mortgage would be lowered every month by the principal payment applied to it, the interest you would be paying each month would also be minimized.

Regarding the illustration of our mortgage calculation, the amount of $833.33(interest) and $240.31 (principal reduction) is the breakdown of the initial mortgage payment. However, do not forget that the total amount of $1,073.64 is fixed. The next month’s payment breakdown would be $832.33 for the interest while for the principal reduction is $241.31. If you observed, the amount of interest goes down while the amount for the principal goes up. This is applicable until your home loan is fully settled under the agreed term.

Your monthly home loan payments also incur additional costs and you have to add that in your funds. One-twelfth of your real estate taxes and homeowners premium needs to be paid also each month plus the principal amount and interest. If payment is collected, you must send the bill to your lender. Your lender is the one paying it on your behalf.

Try our free online extra payment calculator which is the Augmented Mortgage Principal Balance Calculator and see how much savings can be derived by paying extra in your monthly amortization payments. For more loans and mortgage calculators, visit ezmortgagesolutions.net

What You Should Know About Pre-Qualifying for a Mortgage

Homeownership is a dream shared by people all over the world. Knowing, in advance how much home you can afford and how much that home will cost every month can save you much time, effort, and frustration. Why spend time researching homes and visiting homes only to find out afterwards that you can’t afford or won’t qualify for your dream home.Another advantage of pre-qualifying is that sellers are more likely to accept purchase offers from buyers if the offer is accompanied by a statement from a lender that the prospective buyer is able to qualify for, and close on the purchase. In addition, the processing of the buyer’s loan will be much more efficient because the buyer began the paperwork before the contract was accepted.In order to be properly qualified, a prospective buyer will need to provide certain information and documentation to his lender. @ minimum a lender will need the following:

 

• Income information supported by two years, 
• W-2 forms and current pay stubs for all wage earners. 

Self-employed borrowers should provide 2 years income tax returns. This will allow the lender to determine accurate income upon which to calculate a monthly mortgage payment.

Documentation for assets which will be used for the purchase. This would include all cash and stock account statements and gift information, if a gift is being received. This will not allow the lender to fund the down payment, closing costs, and deposits for prepaid items.

A list of all the borrowers current liabilities including the total amount owed and the monthly payment. The lender needs their information to calculate the maximum monthly payment for which the borrower qualifies.
Other documentation, which should be provided, if applicable, includes divorce decrees, separation agreements, disability and unemployment income and retirement benefits.

This documentation will enable the lender to fine tune his numbers and give the borrower an accurate figure for the purchase price and monthly payment for which the borrower can qualify. This will guarantee that the entire transaction will go smoothly.

To Prepay or Not To Prepay Your Mortgage

You’ve just settled on your new home. It’s an exciting time and you’ve got a lot of great plans for family’s future in your wonderful new home. But you’ve also got a new debt-a rather large one- for a thirty year duration. Should you try to pay this loan off sooner by prepaying on it? If you decide to prepay, how much should you pay, how often should you prepay, and what are the mechanics to make sure your payment is properly credited?

As to whether or not to prepay, the answer is based on simple economics. If, for example, your mortgage carries an interest rate of six percent (6%), this means that any prepayment you make will earn six percent. (saving six percent on your mortgage is the same thing as earning six percent). If you have another investment that earns more than six percent, you would be better served by not prepaying your mortgage, but investing in the alternative investment.

If you decide that your best bet is to prepay your mortgage, you have several choices at your disposal. There is a program known as a “bi-weekly mortgage”. The bi-weekly mortgage works in the following manner: If your monthly mortgage payment is $2,000; over the course of a year you would pay a total of $24,000. Under the bi-weekly plan, instead of making one monthly payment of $2,000, you would make a payment of $1,000 every two weeks. At the end of the year you would have paid $26,000 on your loan ($1,000 x 26 payments). This is the equivalent of making one extra monthly payment of $2,000. The extra payment will go toward loan principal and will have the effect of paying the loan off sooner. You may also voluntarily elect to pay more than $1,000 every two weeks. The choice is up to you. The more you pay every two weeks, the sooner your loan will be paid off. Many lenders are not set up to receive bi-weekly payments from their borrowers. There are companies that will handle your bi-weekly payments for you and turn the funds over to your lender. This is done by directly debiting your bank account every two weeks. There is usually an additional charge every time the account is debited. You must make certain to have the funds available in your bank account at the time designated for the charge to your account. This can sometimes be difficult for families with a limited budget. There is also the bi-weekly cost for the service. In spite of these costs, a bi-weekly mortgage program can significantly reduce the term of your mortgage depending on the interest rate and the amount of the prepayment.

Another method to use for prepaying a mortgage is to voluntarily add extra money to your normal monthly payment. Any monies so designated can be shown right on your payment coupon in the box marked “extra principal”. This will go directly toward reducing your loan principal. For example, on a $250,000 thirty year mortgage at 6% interest, the monthly principal and interest payment is $1,499. Adding an additional $100 per month to the payment for a total of $1,599 would reduce the term from thirty years to twenty-five and a half years. This would generate a net savings of more than $50,000 over the life of the loan. An additional $200 per month would reduce the term to twenty-two years, three months for a net savings of $86,000 over the life of the loan. The benefits of utilizing this method are: (1) There is no additional cost to you to implement this plan and (2) You don’t have to prepay every month. The prepayments are voluntary and if you’re unable to make the additional payment in a particular month, there’s no penalty for not doing so, as long as you make the regular monthly payment.

There is one additional method to utilize for making prepayments. You can add a lump sum to your regular monthly payment any time you choose. For example, if you have received a tax refund or a lump sum bonus, that amount can be added to your regular monthly payment. Under this method you are not making regular additional payments every month. Even though these payments can be made on an irregular basis, they will also serve to reduce your loan term.

If you begin making prepayments and decide to sell your home or refinance your mortgage before its full term, you will also benefit from prepaying because your principal balance outstanding will still be less than it would have been by making only the regularly scheduled payments.

Regardless of which method you choose, prepaying your mortgage can be a fairly painless way to generate significant long term savings.

Calculating Payments with the Mortgage Amortization Calculator

How the Mortgage Amortization Calculator works

The mortgage which you obtained for the purchase or refinance of your home is known as a “direct reduction” loan. This means that a portion of every payment you make will be applied toward the direct reduction of the principal balance outstanding.

In the case of a fixed rate loan, your monthly payment for principal and interest will remain fixed for the entire term of your loan. For example, if you borrowed $200,000 at an interest rate of five percent (5%) for a term of thirty years, your monthly payment would be $1,073.64 for principal and interest. After making this payment every month for this entire term, your loan would be completely paid off.

When you make your monthly payment it is divided into interest and principal portions. The payment is first allocated to monthly interest and the remainder is allocated to principal reduction. Using our example of $200,000 at 5% interest for thirty years, the first month’s payment would be divided at $833.33 toward interest and the remainder of 240.31 toward principal reduction. Your new outstanding principal amount due after applying the payment would be $199,759.69 ($200,000-$240.31).

Your second month’s payment would be allocated at $832.33 toward interest and $241.31 toward principal. Your new principal balance at the end of the second month would be $199,518.38.

For illustration purposes let’s look at the third month. Your monthly payment is still $1,073.64, divided as follows: $831.33 for interest and $242.31 toward principal reduction. Your new outstanding principal balance is now $199,276.07.

You will notice that the portion of your payment allocated to interest is decreasing every month while the portion allocated toward principal is increasing every month. This happens because your monthly interest payment is calculated on the outstanding balance due on your loan at the end of the previous month. As this balance decreases every month so does your monthly interest cost. Since your payment stays the same every month, more of each subsequent month’s payment will be allocated to principal.

Pay Your New Home with the Help of Uncle Sam

Congratulations, you’ve decided that it’s time to realize your lifelong dream and purchase a home for your family. You’ve been paying rent for a number of years now (too many) and have nothing to show for it.

Well there’s some great news in store for you. Your Uncle Sam, the US government will help you pay for it. Hard to believe but certainly true.

When you pay rent every month, you send your landlord a check at the beginning of the month and get no additional benefit from it. You see, rent payments made for your living quarters are not deductible on your income taxes. This is not true when you own a home and are making monthly mortgage payments.

Your monthly payment is made up of the following different items:

• Principal payment on the loan
• Interest on the loan
• A portion of your annual homeowners insurance premium
• A portion of your annual real estate taxes

Of the above items (b) Interest and (d) real estate taxes are deductible on your income tax return.
(There may be additional components of your mortgage payment depending on your local taxes and customs, which may also be deductible. These vary in different parts of the country. Check with your local authorities.)

Let’s take an example and see how you can use this to your benefit.
Current rent $1,250 per month
Proposed mortgage payment $1400 per month
Your mortgage payment breaks down like this:
Principal $50.00
Interest $1000
Homeowners Insurance $100
Real estate taxes $250
Total: $1400

Your monthly interest and real estate taxes can be deducted from your income tax return. These two items total $1250 per month ($1,000 for interest and $250 for real estate taxes.) If you are in the 25% tax bracket, this deduction will save $312.50 per month in taxes that you otherwise would have had to pay the government. Your effective monthly mortgage payment is really $1,087.50($1400 less 312.50) In this example; this is less than you were paying in rent.

Total mortgage payment $1400.00
Monthly savings on income taxes $312.50
Effective monthly mortgage payment $1,087.50

Now, here’s the important part. Since you are saving $312.50 per month in income taxes you can fill a new form W-4 with your employer and ask them to reduce your withholdings from your salary by $312.50 per month. You’ve just given yourself a monthly raise of $312.50 which you can use every month toward your mortgage payment of $1400-thereby effectively reducing the payment to $1,087.50-which in this example is less than your rent payment.