An online mortgage calculator can help you to calculate mortgage payments and interest. Such calculators can take various forms, but before using them you must make sure you understand what you are using them for and how to use them. Here is an explanation of the common fields you will fill in using a mortgage calculator.

Principal Amount

The principal amount is the sum you are borrowing. It is not the actual cost of your new home, since you will likely be making a down payment. This should be deducted from the cost to provide you with the principal, or capital sum you are borrowing. In effect, this is the amount of your mortgage loan.

All mortgage calculators intended to calculate mortgage variables will provide a ‘Principal’ field. The rest of the calculations will be based upon this figure.

Mortgage Interest rate

Enter your offered mortgage interest rate into this box. There are several ways in which this can be used. Interest charged on mortgages is usually simple interest, where the interest over the entire term of your mortgage is applied.

Thus, if the annual interest rate is 4% on a fully amortized $200,000 mortgage, you will pay $143,739 over a 30 year mortgage period. For an interest only mortgage, where you pay the principal at the end of the term, that rises to $240,000 at the end of the 30 years.

The only circumstance in which compound interest would be applied on a mortgage is where the monthly repayment did not cover the interest. Then you will pay interest on the interest still due.

The amortized mortgage calculator is very useful because it avoids you having to recalculate the interest due for each month of the 30 years. Since the first monthly payment reduces the principal, you have to calculate the interest due the next month on the new principal, and so on for 30 years.  Rather you than me!

Mortgage Term

The third box will ask you for the term of the mortgage – in the USA this will usually be 15 or 30 years. Add the figure and then click to get your details. You will find that the longer your mortgage period is, the less you pay each month, but the more overall interest you will pay. For example:

$200,000 mortgage at 4% over 15 years:

Monthly Payment:  $1,479.38
Interest paid: $66,288
Total paid:  $266,288

$200,000 mortgage at 4% over 30 years:

Monthly Payment: $954.83
Interest paid: $143,739
Total paid: $343,739

So the mortgage calculator tells you that you will pay $524.55 less per month over 30 years rather than over 15 years but you will repay $77,451 more in total. You can make a decision based on that plus your ability to pay the respective monthly repayments.

Interest Rate Increases

This is fine if you are locked into the same interest rate over the full period of the mortgage, However, that will be unlikely, and if you extend yourself by opting for a shorter repayment period, you might suffer if mortgage interest rates increase.

You can use the mortgage calculator to calculate mortgage payments at higher interest rates. Should rates increase to 6% (and they have been much higher than that in the past) your monthly repayments over 15 years would be $1,688 and over 30 years, $1,199.

Usefulness of a Mortgage Calculator

As you can see, a mortgage calculator has uses other than just calculating your interest. You can find out your monthly repayments over different periods and the effect of increasing interest rates on your ability to pay.

However, they do more than that.  You can play with the calculator by entering various figures until you reach the maximum you are prepared to pay each month. You will then find the amount of mortgage loan you will get for that figure. Add your down payment, and that is the maximum amount you can offer for your new home.

A mortgage calculator has many uses – so make use of it to your advantage. Calculate mortgage payments you can afford.