Determining Monthly Borrowing Power of Consumers

The monthly borrowing power is something all consumers must determine before they consider applying for and obtaining any loan, especially a mortgage. It pertains to the amount that an individual could comfortably shoulder as a loan repayment each month. That amount would take into considerations many other financial factors like the basic and necessary expenses and usual discretionary spending.

In general, any borrower should avoid getting a mortgage or loan that bears monthly payment that is greater than his monthly borrowing power. Anyone who takes the great risk of doing so could end up in real and inevitable trouble in the long run. A responsible consumer would first take time and effort to know more about his borrowing power on a monthly basis before taking actions to obtain any loan, especially a mortgage.

There is so much at stake when a person gets a mortgage. It is a secured type of loan, wherein his house is made the collateral or security. In case of a default, the lender assumes the right to repossess the property and sell it just to cover the loan amount that the borrower failed to repay. Consequently, the borrower would lose his home, damage his credit score, and end up totally demoralized (and homeless).

So how does one determine such a borrowing power? There is no need to use complicated mathematical formulas and calculations. Using the typical online mortgage calculator featured in most Websites of loan providers would be ideal. To use the tool, fill in specified blanks, which usually consist of the principal or loan amount, the interest rate (monthly), and the term or duration of the loan. After just a click, the calculator would provide the total loan amount after the maturity and the monthly amortization required.

The data obtained would be the basis for determining the individual’s monthly borrowing power. The monthly repayment amount should be much lower than the total monthly income earned by the person. An individual has to spend for many other expenses in a month (necessities, rents, savings, other loan repayments, children’s education, food, and the likes). If adding those monthly expenses and the monthly amortization on a possible mortgage would still be lower than the total monthly income, the amount (monthly amortization) could be considered as within his borrowing power for the moment. The borrowing power could reach an amount wherein the difference between the monthly earnings and overall expenses (including the possible mortgage amortization) could reach a break-even.   

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Do Mortgage Calculators Automatically Use Current Interest Rates?

Many consumers using mortgage calculators provided in Websites wonder if such tools use current interest rates. They could not help but ask if the figures they derive are accurate. Experts assert that there should be no issue regarding the rates. It is a common knowledge that most Websites try to apply and use latest interest rates in their calculators.

However, it should also be pointed out that not all calculators use latest interest rates. That is why many online mortgage and lending Websites opt to give their visitors the freedom to supply interest rates in designated blank fields. An online user could first find out updated news and announcements about interest rates so he could put the right data when using online loan calculators.

No matter how willing loan providers could be to use updated interest rate figures, they could sometimes not be able to catch up. Interest rates may sometimes be very volatile that they change not just on a daily basis but also hourly. In such instances, it would be impossible to always keep a mortgage calculator updated.

Current interest rates should be used when using mortgage calculators. This is because through doing so, any potential borrower could be sure about the accuracy of the figures derived from the virtual computation. The information derived would play a crucial role in the decision-making process. Would a borrower be comfortable about the monthly amortization of a loan given the prevailing interest rates? Is the principal small or too big for the interest rates applied?

Financial analysis on a personal level should also be made accurate and reliable. This is why there is a need to make sure mortgage and loan calculators would always use updated and correct figures. These days, consumers are more discerning and particular about the costs of getting and keeping loans. Money is hard earned, that’s why.

Anyone who intends to yield accurate results from mortgage calculators should make sure the tools use current interest rates. To find out about the latest updates, it would be better to ask lenders’ representatives or read the latest financial news regarding imposed interest rates in the market. Borrowers should first look at the important mathematical figures and considerations before finally deciding whether to take a loan product or not. Fortunately, most Websites are now more responsible enough to constantly update the rates they use in their automatic online loan calculators.

Amortization Schedule To Help With Monthly Mortgage Payment Breakdown

When you are wondering how your monthly amortization payment for your house is allocated between the interest and principal amount of your loan, you would need to check its amortization schedule. This is a table that gives the specific details of every payment you make for your mortgage. Another good thing about this is that it has separate columns for interest payment and principal payment so that you may see how your payment affects your mortgage in the process. As such, this schedule is considered to be an important document as this will show how much you have actually paid for your house through the mortgage.

If you can get a chance to look at an amortization schedule, you will notice that bulk of your monthly payment is allocated to the interest in the early years of your mortgage. This is why when you get to check your principal balance during these early years; you will see that it is as if your principal balance has not been reduced to as much as the amount of the payments you have made. This is because interest rates are being paid first before the principal balance. Mortgage companies want to ensure that they will be able to get their interest earnings the soonest possible time. This is also one reason that if prepayment is allowed, it is more recommended to do it during the early years of your mortgage. This is because when a prepayment is made, the whole prepayment amount is applied to the principal balance. As such, significant changes will apply to the amortization table to reduce the monthly payment. This will also change the allocation of interest and principal amount to adjust with the new monthly payable.

Other than this consideration, an amortization table can also be helpful in determining if an option to refinance an existing loan can provide you with greater savings than to continue the loan. This option of refinancing usually is being considered especially when there was a sudden decline of interest rates. Before taking another step further, it will be best to check the new amortization table and compare it against the existing one to validate whether it can be a good option to refinance or not.

An amortization schedule can be very helpful in making decisions that can maximize your savings in your mortgage. Understanding the figures in this table can even save you from owing further than what you can.

Adding Half of Your Tax Refund Money To Your Mortgage Payment

Adding half of your tax refund to your mortgage payment each year will not only stop you from spending it on something you don’t need but it will save you a lot of money on your mortgage loan. You’ll still get to spend half of it so you can’t complain.

Personally, I take half of all extra money I make to put towards my mortgage loan including bonuses at work, holiday money and tax refunds. However, adding just half of your tax refund each year will save you a lot of money as well.

Use the mortgage calculator at the bottom of this page and follow along so you can realize exactly what you’re saving on your mortgage when adding money to it. First, plug in the terms of your mortgage to see the monthly mortgage payment that you currently have. Remember that the taxes are probably included in your mortgage payment so the number on the calculator will be lower by the monthly amount of your taxes.

Next I want you to think about your average tax refund and cut that number in half so that you don’t have to commit to using it all on your mortgage. Let’s assume it’s $3,000 and you cut that in half to $1,500. Then you need to divide $1,500 by 12 to get the monthly amount because the mortgage calculator uses a monthly addition.

$1500 / 12 = $125

Plug that number into the calculator where it says additional monthly principal to see how much money you’ll save. If you write down the total amount of interest you’d pay without adding any principal and compare it to the amount when you’re adding principal you’ll see how much money you’ll save over the course of the loan.

$150,000 over 30 years at 6% interest is a monthly payment of $900/month

Total Interest = $174,000

Total Interest adding $125/mo = $120,000
Total Interest adding $250/mo = $93,500

You’ll save $55,000 by only giving up have of your tax refund each year. A tax refund of only $3,000 is actually pretty small, so most of you probably have more than that to cut in half.

Forget the amount of interest you’re saving and think of it as a savings plan because the money is very hard to access once you add it to your mortgage loan. If you put half of your tax refund in a savings account you’ll end up using it before you know it.

After paying extra principal for 5 years you’ll be paying more principal in each monthly mortgage payemnt as well. As the total balance of your mortgage goes down you’re paying the same interest percent on less money so the interest portion goes down and the principal portion goes up. You can see that if you look at an amortization schedule of your mortgage payments.

You should continue to find ways to add money to your mortgage payment that work for you. As you can see, you’ll save a lot of money over the course of your loan. Do things like giving up half of your cigarettes, half of your daily coffees or half of your monthly spending money. Whatever you think you can handle you should do because, if nothing else, it’s a great savings account.

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Should You Pay Down Your Car Loan or Mortgage Loan First?

I get this question a lot because people aren’t sure if they should add extra payments to their mortgage or their car loan in order to save the most money. It can go both ways depending on you, your monthly payments and interest rates on both loans.

Why Does It Depend On You?

I’ll talk about the amount of interest each loan has overall in a bit but first I want to know about your ability to save and actually do what you set out to do. If you have an extra $500 per month and want to add it to your car loan or mortgage loan I’d say add it to the car loan first. Then add the $500 plus the amount of your car loan to your mortgage because over time that would be the best idea.

However, if you know this will be short lived I recommend simply adding the extra monthly payments the loan with the higher interest rate.

Current Interest Rates

The length of the loan has nothing to do with the amount of interest charged each period (usually monthly). If the current interest rate on your car is 5% it means you’re being charged 5% per year or .4166% per month (5 / 12 = .4166). So if you owe $10,000 at 5% your monthly interest will be 10000 x .004166 (.4166%) = $41.66. It doesn’t matter if that loan is over 5 years or 20 years the interest for the first month is the same.

Here’s where the interest changes:

$10,000 at 5% over 5 years

Monthly Payment – $188.71

Monthly Interest – $41.66
Monthly Principal – $147.05

$10,000 at 5% over 20 years

Monthly Payment – $66.00

Monthly Interest – $41.66
Monthly Principal – $24.34

For the second month in the left column the monthly principal will be subtracted from the loan amount of $10,000. $10,000 – 147.05 = $9,852.95. The right column will only lower to $9,975.66.

$9,852.95 at 5% over 5 years

Monthly Payment – $188.71

Monthly Interest – $41.05
Monthly Principal – $147.66

$9,975.66 at 5% over 20 years

Monthly Payment – $66.00

Monthly Interest – $41.56
Monthly Principal – $24.44

That will continue for each and every month for the entire loan. Since the interest is calculated exactly the same for any loan, the higher interest rate is the one you want to pay down first. If you have an extra $500 to spend on paying down your loan and you put it to the left column your loan will get paid off much sooner because of the extra principal in the payment already. You’d have to add $125 to the right column to equal the left and pay it off in 5 years anyways.

Best Way To Pay Off Both Loans If Fully Committing $500

Add $500 to the left column first until it’s paid off and it will take you 1.25 years instead of 5 years and you’ll save $1,000 in interest. Then add $500 + $188 to the right column to pay it off in 1.14 years and save $5,500 in interest.

Both loans paid in 2.39 years total and about $600 paid in interest.

IF you paid the left column first it would take you 2.70 years and you’d pay about $900 in interest.

Remember these are very small loans and you’d save much more on a mortgage and car loan. The point to be made is that you’re paying interest on the amount left on your loan no matter what. If you want the interest portion to be lower then add principal each month and it will get much lower.

Use my mortgage calculator to plug in these different amount and see how much interest you’ll save over the loan by adding extra money.

Average Car Loan $20,000 at 5% – Total Interest $2,650

Add $200 – Save $1,000 and 2 years
Add $400 – Save $1,650 and 2.70 years

Average Mortgage Loan $150,000 at 6% – Total Interest $173,500

Add $200 – Save $71,000 and 11 years
Add $400 – Save $99,500 and 15.50 years

Since your mortgage loan is much longer then you should get rid of your car payment first and then use your extra money plus the car payment to hammer away at your mortgage. Look at an amortization schedule over 30 years and look at the amount of interest paid compared to the principal.

Then look past year 10 of payments and see the difference. The amount of interest has lowered because paying 6% on $150,000 is much more then paying 6% on $90,000. So even if you add extra money for 5 years and need to stop because you’re in a jam your mortgage payment will now have MUCH more principal with each monthly payment. So the hard work paid off and will continue to pay off even without adding more each month.

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The Free Mortgage Calculator

Amortization Schedule – Actually Simple Math

Use my free mortgage calculator to see an amortization schedule that shows you the breakdown of principal and interest in your monthly mortgage payment. It may still look confusing as to how they come up with “that” amount of principal and interest each month.

Use $150,000 at 5% over 30 years in the mortgage calculator

You’ll see a mortgage payment of $805 which has $180 principal and $625 interest. Everyone seems to know that those numbers change every month, but is there an exact formula to realize why it’s changing? Yes.

In the first mortgage payment you will have $180 in principal which means the amount you owe $150,000 becomes $149,820. So now you’re only paying 5% interest on $149,820 which will be slightly less interest.

Example – 150,000 at 5% interest over 30 years.

Payment 1) 150,000 x .05 = 7500 per year – Divide by 12 months and it equals $625 which is the first interest payment.

Payment 2) 149,820 x .05 = 7491 / 12 months = $624.25

As you can see it only went down .75 because you paid down $180 in that first payment. That means that you no longer pay interest on the $180 which is only .75/month.

Here’s how: 180 x .05 = 9 divided by 12 months = .75

I love math – Don’t you? It always works..

So if your monthly interest keeps lowering why is your mortgage payment always the same? The interest portion goes down .75 and the principal portion will increase to 180.75 to keep the payment the same. After the 12th month your payment will be broken down to $615 interest and $190 principal.

Add principal each month to pay your mortgage off sooner

25 Years – Add $75 per month – Save $28,000
20 Years – Add $180 per month – Save $52,000
15 Years – Add $380 per month – Save $77,000

Not only are you saving that amount in interest AND saving all those years of payments but you’ll be saving that payment amount per month for another 5, 10 or 15 years.

5 Years – 805 x 60 = $48,300
10 Years – 805 x 120 = $96,600
15 Years – 805 x 180 = $144,900

Personally I think EVERYONE should be able to add $75 to their monthly mortgage payment to save 5 years, $28,000 and another $48,300 worth of savings if you have the will power!

Here’s what I like to do

Right when you buy a home you need to input all of your terms into a mortgage calculator and print out the entire amortization schedule. I feel like people don’t see the big savings as fast as I do because they don’t have the amortization schedule.

So here’s another way to help you pay down your mortgage faster. The amortization schedule will show you all 360 payments and exactly what they’ll be each month. All of the principal payments down the column will add up to $150,000 which means those are the 360 principal payments that need to be made.

Month 1 – $805 (180 principal)
Month 2 – 805 (180.75 pricipal)

What I want you to do is make your first payment ($805) with an additional $180.75 which is the amount of principal in month 2 (Total $985.75). If you can always pay 2 payments each month you’ll pay it down twice as fast. Then check off month 1 and 2 on your amortization schedule and see that you already saved the Month 2 interest of $624.25. Everytime you make an extra principal payment circle the interest part that you saved so you can see it add up very fast.

Just because you add the principal from month 2 doesn’t mean you can skip the next payment. If you skipped the next payment everytime you’d end up paying it off in 30 years anyways and you’d have to pay interest for having the banks money.

Having the amortization schedule makes you look at it every month and see what you owe and how much you’re paying down each month. People lose track of it because they just have to make the payment each month.

The most important part would be to pay down enough of that principal side to make the principal and interest even with each payment. So that you’re paying $400 interest and $400 principal which is around payment #180. Once you get there you feel better about each monthly payment of $805 actually going towards your mortage.

Knowledge Will Save You Thousands! The Free Mortgage Calculator

How a Mortgage Calculator Can Help You Understand The Buying Process

So you’re dreaming of buying a home. Are you ready? Do you have any idea where to start? If you’re unfamiliar with the steps involved in buying home, then the Internet is a great place to begin.

Search for mortgage and borrowing power calculators, they’re the perfect tool to help you understand the lending process.

          Nearly all financial institutions making home loans will have calculators on their sites. Before you apply for a loan you can figure out how much you can borrow with a borrowing power calculator. It allows you to compute how much you can borrow based on your income and debts. It allows you some insight into the difference between good and bad debt and how that debt affects your credit rating and how much you can borrow. You’ll see in the results how credit card debt, available credit and your debt-to-income ratio can make you look like a risk to lenders. 

          A mortgage calculator can help greatly in understanding how mortgage loans work.  You input the principal (the amount the borrowing power calculator estimated you could borrow), rate, term and down payment. You can compare all these variables to get a picture as to what you can afford to pay each month. To get a truer picture, look to see whether the calculator considers property tax or insurance.

Most will include an amortization schedule that breaks down over time how much of your payment goes to the principal and interest.

          Using these online calculators is a great way to gain some understanding about how lenders gauge risk. They can help you in setting goals to make yourself and your finances look attractive as possible to lenders. What you learn and apply will make your finances shine, showing that you’re a responsible borrower, worthy of great mortgage terms.