Mortgage Calculation Mastery

A mortgage is a specific type of loan used to purchase real estate. Understanding mortgage calculations is crucial for homebuyers:

**Down Payment**: The initial payment made when purchasing a home, typically 5-20% of the purchase price.

**Principal & Interest (P&I)**: The core components of your monthly mortgage payment.

**Property Taxes**: Annual taxes divided into monthly payments, often included in mortgage payments.

**Homeowners Insurance**: Required protection that's usually part of monthly payments.

**PMI (Private Mortgage Insurance)**: Required when down payment is less than 20%.

The complete monthly mortgage payment (PITI) includes:

**P** - Principal & Interest (calculated using amortization formula) **T** - Property Taxes (annual tax ÷ 12) **I** - Homeowners Insurance (annual premium ÷ 12) **I** - PMI if applicable (typically 0.5-1% of loan amount annually)

Example for a $300,000 home: - Loan amount: $240,000 (20% down) - Interest rate: 4.5% - Monthly P&I: $1,216.04 - Property tax: $250/month - Insurance: $100/month - Total PITI: $1,566.04

Optimize your mortgage with these strategies:

**15 vs 30 Year Terms**: Shorter terms have higher payments but save substantial interest.

**Points**: Paying points upfront can lower your interest rate. Calculate the break-even period.

**ARM vs Fixed**: Adjustable-rate mortgages may start lower but carry risk of rate increases.

**Refinancing**: When rates drop, refinancing can reduce payments or shorten loan terms.

Lenders use specific ratios to determine affordability:

**28% Rule**: Housing expenses shouldn't exceed 28% of gross monthly income.

**36% Rule**: Total debt payments shouldn't exceed 36% of gross monthly income.

**DTI (Debt-to-Income)**: Calculate by dividing total monthly debt by gross monthly income.

These ratios help determine maximum affordable home price.

Understanding amortization helps visualize loan payoff:

**Early Years**: Payments are mostly interest with little principal reduction.

**Mid-Term**: Balance shifts toward more principal payment.

**Final Years**: Majority of payment goes to principal.

Creating an amortization schedule shows exactly how each payment is allocated and when the loan will be paid off.