This mortgage calculator is a simple loan calculator. It is a tool that helps you estimate the cost of your mortgage - you can use it as your mortgage estimator. With our smart mortgage payment calculator you will be able to easily compute your monthly installments for different payback periods and mortgage rates (mortgage amortization). Thinking about buying your first property? Wondering whether you can afford it? After you put in just a few digits, our mortgage calculator will tell you what your monthly payment and your total payments will be. To know the details of how to calculate mortgage payment check out the mortgage payment formula section below. In the text below we will also explain to you: what is a mortgage definition and what is a reverse mortgage.

What is a mortgage?

Formally, a mortgage is a legal agreement by which a bank (or another mortgage lender) lends a debtor money in exchange for taking the title of debtors property. The bank holds this title until the debt is fully repaid.

The inseparable part of a mortgage is the interest, which is the cost of a loan for the debtor and the remuneration for the bank. In other words, we can say that a mortgage is a kind of a personal loan that the bank gives you to help you buy a house. The characteristic feature of each mortgage is setting the collateral on the real estate the debtor buys. It means that if the debtor is unable to pay monthly installments, the bank takes ownership of the house.

You should know that usually, the mortgage payment consists of four components: principal, interest, insurance, and taxes. To make calculations more straightforward, in this calculator we focus on the first two parts.

How to calculate a mortgage payment

In order to understand it, you need to familiarize yourself with some basic terms:

  • Principal. This is simply the amount you want to borrow from the bank. It will depend on two variables: the price of the property and the down payment.

  • Down payment. Very important when applying for a mortgage. This is the amount of money you already have and want to use to pay for the property. Down payment usually is the main obstacle in getting a mortgage. The times when it was possible to apply for a mortgage covering 100% or 120% of property's value are long gone. The required amount differs depending on the institution and of course, the country. In the U.S., for example, down payments vary from 3,5% (FHA loans) to 20-25% of the purchase price. But that's not all. Down payment sum also influences the interest rate. The bigger sum you can put down - the lower the rate. This is sometimes called LTV (loan-to-value). So, if you see 70% LVT offer this simply means that you can borrow 70% of the purchase price while minimum deposit is 30%.

  • Annual interest rate. This in one of the most important factors you need to take into account when choosing a mortgage. Even though you will have to repay your mortgage at a monthly rate, the interest rate is calculated annually. Each monthly rate consists of capital and interest. In the first few years, you will normally be repaying more interest than capital. The balance changes as you get nearer to the end of your mortgage term.

  • Loan term. This one's easy - it is the period in which you need to repay your whole loan. You take a mortgage loan for a number of years but you will be making repayments on a monthly basis. Loan terms vary depending on the bank and mortgage type (fixed rate mortgage have shorter terms than variable rate). Usually one can take a loan for up to 20 or even 30 years. Loan term influences mortgage conditions. The longer the term the less you need to pay monthly, but be advised that eventually you will pay more (it will take you longer to repay the principal, so the interest will be higher).

Now that you know the basics, we can get to our calculation. However, be advised that the calculator provides you with just an illustration and does not include all the details and costs the banks charge when giving a loan.

  1. First, you need to put in the principal - in our mortgage calculator the field is simply called "amount". Remember, in this field you fill only the amount you want to borrow (deposit excluded).

  2. Enter your loan term.

  3. Fill in the interest rate. If you need help figuring our what your interest rate is, you can use our interest calculator.

  4. Now you can see what your monthly payment will be and what you will pay in total.

  5. Need to share this data with anyone? Just press the "send this result" button.

Remember that this is just an estimation. When taking a mortgage you need to think about other costs that the bank charges or requires. This is particularly important in case of long term mortgages combined with low down payment. These are some of the more common charges:

  • Insurance. No one will give you a loan if you don't insure your newly purchased property against loses from fire, flooding, etc. The bank may also require you to buy a pay private mortgage insurance in case you will be unable to repay your loan (usually when the down payment is lower than 20%). You will have to buy property insurance during the whole loan period. Some banks will also make you buy insurance against unemployment and other personal risks. This all depends on the bank's imagination.

  • Additional products. (Credit cards, personal accounts etc.) Some banks offer better terms in return for you buying additional products. Usually you will need to use them throughout the whole term of your loan.

  • Taxes. This is not an expense directly related to a mortgage, however, you need to remember that owning a property is invariably associated with paying property taxes. In some countries (like U.S.) if you have a low down payment the lender will set up an escrow account to collect any additional expenses, which will be included in your monthly payment.

Mortgage payment formula

If you would like to know how to calculate mortgage payment on your own, the equation is:

MP=P[r(1+r)n/(1+r)n-1]

  • MP = monthly payment
  • P = principal
  • r = monthly interest rate**
  • n = number of months you will have to repay your loan for

**To calculate your monthly interest rate simply divide the annual interest rate by 12.

Let's do an example calculation. To do that, we need to know: the principal amount, monthly interest rate, loan period/number of payments. You can find this information in your mortgage loan agreement. For our purposes, we will assume the following numbers:

  • our principal (P) equals 100 000 EUR
  • our loan period is 20 years - that is 240 months, therefore "n" = 240
  • the annual interest rate amounts to 5%, this divided by 12 equals 0,004 (0,05/12) and this is our "r"

Now, we can get on with the calculation:

MP=100 000[0,004(1+0,004)240/(1+0,004)240-1]

To make it easier, we will add 1 to the "r"

MP=100 000(0,004*1,004240/1,004240-1)

In the next step we have to raise the "(1+r)" (in our example 1,004) to the power of "n" (in our example 240). It is best to use a calculator (put in the value to be raised, than press the xy button and enter the "n" value, then press "=") or an excel sheet (use the POWER function: =power(number to be raised,power). The number in our case is: 2,607. Now our equation would look like this:

MP=100 000(0,004*2,607/2,607-1)

Let's simplify again and multiply the "r" times the result of raising to power (the top value) and subtract "1" from the result of raising to power on the bottom:

MP=100 000(0,01043)/1,607

All that is left to do now is to divide the numerator by the denominator...

MP=100 000*0,006490

...and there you go: your monthly payment is 649,03. If you want to know what the total sum of all your payments will amount to, just multiply your monthly payment (MP) by the number of months you will pay your loan (n). In our example it would be:

649,03*240=155767,2

When you know what your total payments will be, you can also calculate how much you will pay the bank for loaning you money. Just subtract your principal from your total payments. In our case the costs of our loan would amount to 55 767,2 EUR.

You can also forget about all this long counting and use our mortgage calculator.

Fixed vs. variable rate mortgage

While choosing a mortgage there are more things to consider than just the interest rate and fees. You also need to decide what type of mortgage you want. There are of course many variations but the main two types are:

  • Fixed rate - the interest rate will stay the same throughout the whole mortgage term.
  • Variable rate - the interest rate will change (usually, it is linked to the national bank's base rate or the reference interest rate on the inter bank market).

A peace of mind is the biggest advantage of the fixed rate mortgage. You can be sure that your rate will stay the same and plan your expenses with more accuracy. Keep in mind however, that fixed rates are usually a bit higher than variable ones. And, if the rates fall, you won't benefit from it.

The advantages of variable rate mortgages lie in its flexibility - when the base rate falls, your interest falls as well, if you want to overpay and get out early, you can. Ironically, flexibility is also their main disadvantage - if the base rate goes up, so does your interest, thus it is more difficult to plan your expenses and you need to remember to have some extra money should the rate go up.

Balloon payment mortgage

Balloon payment mortgages are a special kind of mortgage where you are left with a large payment at the end of the loan. This means that the mortgage does not fully amortize over its lifespan. Balloon payment is always higher than monthly payments. It could amount to 2 times the monthly payment but it could also be thousands of dollars. In some cases, the payment is divided into a couple of smaller ones but usually, it is one lump sum paid at maturity. Balloon mortgages can have fixed or variable rates. Due to the high risk for small owners balloon loans are more common in commercial real estate, as an average homeowner could find it difficult to repay the balance due at the loan's maturity. However, there are ways to overcome this difficulty. Some borrowers simply plan to sell their house before the balloon payment is due, others plan to refinance their loan when the balloon payment is due. If you decide to do this, the lender will convert your remaining balance into a traditional fully amortized loan. There are balloon mortgages which refinance the remaining balance automatically - they are called "two-step" mortgages. If you are considering a balloon loan, check our balloon payment calculator to help you estimate how much it will cost you.

There are of course advantages to balloon loans, such as lower interest rates and monthly payments. Sometimes, it is also possible to take a bigger loan than if you were taking a standard fixed or variable rate mortgage. You need to be careful however, because you might not be able to sell your house before the maturity date or the prices in the housing market might fall substantially and you will lose money. There is also risk attached to refinancing. If your financial situation deteriorates or the interest rates have gone up in the interim you might be faced with unaffordable terms.

Reverse mortgage

A reverse mortgage is a type of mortgage loan for a senior homeowner. Simply speaking, a reverse mortgage is a financial service which allows the homeowner to exchange their property for money. A reverse mortgage enables the property owner to release the funds accumulated in his home while maintaining the right to live in it. Formally we can say that thanks to a reverse mortgage, an illiquid asset (the house) becomes a source of liquid cash which can be used for consumption by the retiree.

Note that usually, the borrower is still responsible for maintaining the home, paying the property taxes and homeowner's insurance.

One specific feature of a reverse mortgage is that even though it is a type of a loan, it does not have to be repaid until the debtor passes away or moves out. At that time, the homeowner or the heirs can repay the balance of the reverse mortgage, or sell the house to pay off the balance.

The amount of money you can get from a reverse mortgage depends on many factors. Among them, the most important are: the age of the borrower, the interest rate, and value of the home. In some countries, there are also some lending limits imposed by the government.

Usually, the reverse mortgage loan can be received in the form of:

  • Term payments – monthly payments paid during a specific number of periods (months, years),

  • Tenure – monthly payments paid for the life of the agreement,

  • Line of credit – you can draw from it as needed up to the maximum amount,

  • Lump sum – a one-off payment paid when the agreement is closed. It is also possible to combine the above options.

Generally, there are two models of financial products which are commonly named reverse mortgage:

  • Loan model (a standard reverse mortgage, also known as lifetime mortgage, reverse mortgage loan, home equity conversion mortgage). In this model a loan taken by a borrower (homeowner) is repaid from the money acquired from the sale of the estate after his death.

  • Sale model (also known as lifetime cash benefit, annuity for life, home reversion, reversion plan, annuity for life). In this model, the ownership of the property is transferred to the bank (or another financial institution) when the agreement is signed. In exchange, the borrower has the lifetime right to use the property and receives a lifetime stream of money from this transaction which he can use as an additional source of income in retirement.

Mateusz Mucha, Joanna Andrzejewska and Tomasz Jedynak - PhD.

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