Use the calculator below to find out what a mortgage will really cost you. Compare the affects of interest rate and loan length on total cost and interest paid. Finally, don't forget to see how much an extra $100 a month can save you.
A mortgage is a type loan that is specifically used to buy a home. The loan is secured by the home itself,
which means if the borrower fails to repay the loan, the lender can take possession of the home through a
process called foreclosure. Mortgages are typically repaid over a period of 15 to 30 years, with fixed or
adjustable interest rates.
Mortgages are large loans which typically take between 15 to 30 years to pay off. When a borrower applies
for a mortgage, the lender will evaluate their credit history, income, debts and other
financial factors to determine how much they can borrow and at what interest rate.
Typically, the borrower will then make a down payment, which is a percentage of the home's
purchase price, and the lender will provide the remaining
funds needed to buy the home. The borrower will then make monthly payments to the lender, which will include
both principal and interest, until the loan is paid off.
There are a variety of mortgages on the market, the most common being a fixed mortgage. However, there are more types of loans that available to borrowers, the ones listed are just the most common.
A mortgage rate is the interest a lender charges on the amount of money borrowed to buy a home. Mortgage
rates play a major role in home affordability, directly affecting the total cost of borrowing for
homeowners. Higher mortgage rates reduce purchasing power, making homes less affordable and slowing demand
in the housing market.
Even a small change in the interest rate can have a significant impact over the life of a loan.
For example, on a $500,000 mortgage, an increase from 5% to 6% results in nearly $116,000 more in interest
paid over 30 years.
Interest is most commonly felt in the first few years of a mortgage, as the majority of the monthly payment
goes towards interest rather than the principal. This means if you had an interest rate around 7% and paid
$20,000 towards your mortgage in the first year, only around $2,600 would actually go towards the principal.
In fact, at this rate, it would take about 22 years to pay off the first half of the initial loan.
This sensitivity to interest rates is why they are closely monitored by home buyers, real estate
professionals, policymakers, and now you. If you decide to take out a mortgage with a high interest rate,
it's important to know that you can refinance your loan later on at a later date with a lower rate.
Below is a graph of the median 30-year fixed mortgage rate from 1990 to now. I'd highly recommend using the
calculator at the top of this page to see how the interest rates affects not only your monthly payment,
but also the total cost of a loan.
In recent years home affordability has become a major issue for many Americans. As home prices have grown quicker than wages, many people feel dissuaded and worry if they'll ever be able to afford a home. As you can see below, home prices surged post 2020 and have yet to return to pre-pandemic levels. This widening gap suggests increasing financial strain on home buyers as wages fail to keep pace with rising housing costs.
Graphs can be used to mislead just as easily as they can be used to inform. Take for instance the graph
above, it shows the widening gap between home prices and median wage. However, it fails to account for the
impact of
changing mortgage rates.
In order to better understand home affordability we will look at the difference between median income and
qualified income. Qualified income is the amount of money needed to keep the median annual cost of
homeownership below 30% of a persons income.
When reading the graph below, it's important to keep in mind that this is (median income - qualified
income). This means negative values indicate the median income is enough to comfortably afford a home, while
positive values indicate the opposite.
While 2009 to 2021 was a period of stability between qualified and actual income,
the market following the COVID-19 pandemic has become much more expensive. The median American needs to make
an additional $30,000 to $45,000 more a year to afford a new home.
To understand what you can afford, you first must become familiar with two important concepts: The 28/36 Rule
and your debt-to-income ratio.
The 28/36 Rule is a general guideline used by many lenders to determine if a borrower will be able to repay
a loan. It states that a borrower's monthly housing costs (mortgage payment, property taxes, insurance)
shouldn't exceed 28% of their gross monthly income.
Furthermore, a borrower's total monthly debt payments (including housing costs, credit cards, student loans,
etc.) shouldn't exceed 36% of their gross monthly income. A borrowers total monthly debt payments divided by
their gross monthly income is their debt-to-income ratio (DTI).
The calculator below allows you to see your suggested loan amount based on loan length, interest rate, and
income. This calculator assumes you want to use 28% of your income to pay for monthly housing costs, and
allows you to add on estimated monthly expenses of your choosing. The output given is the amount you can
afford in addition to your down payment.
You can afford a loan of $245,502