How are mortgages different than typical loans, and why would you need a mortgage payment calculator?
Table of Contents
- What Are Mortgages for Homebuyers?
- How to Calculate Your Mortgage Payments
- Mashvisor’s Mortgage Calculator – What Makes It Better?
- Bottom Line
A mortgage calculator is a tool that every real estate investor needs to use in order to make calculations and predictions about their investment. In this article, I will explain everything you need to know about mortgages and their types, how mortgages are calculated, and I will show you what makes Mashvisor’s mortgage calculator the best option for you.
What Are Mortgages for Homebuyers?
Mortgages are basically loans that were designed for homebuyers. However, the difference between a standard loan and a mortgage is mainly in the requirements and specifics of the loan.
There are a number of money lenders in the US that specialize in lending money to homebuyers. Each lender imposes its own criteria and requirements to qualify for a mortgage. What they all have in common, however, is that they all specialize in real estate financing. It includes financing in order to purchase a primary residence or buy investment properties.
Below, we will go over the different types of loans that you can expect to find in the US, according to the type of lenders, the structure of the loan, and its duration.
Types of Mortgage Lenders
There are two ways to categorize mortgage loans. The first way is to separate mortgage types based on the lender and qualifications needed to borrow the money. Based on this categorization, there are two main types of mortgages that you can expect to find:
1. Conventional Mortgages
As the name suggests, it is the most common type of mortgage loan. Conventional loans are not backed by the federal government, which means private lenders offer them. There are two types of conventional mortgages:
- Conforming mortgage: This type “conforms” to the set of standards placed by the FHFA, such as factors about the borrower’s credit score and debt level.
- Non-conforming loans: This type does not meet FHFA standards, which means they are more flexible and are used by borrowers who have gone through financial issues such as bankruptcy.
Pros and Cons
As you would expect, there are advantages and disadvantages to using conventional mortgage loans.
For example, conforming loans have a strict limit on the size of the loan. As of 2022, the limits on a conforming loan are $647,200 in most markets and $970,800 in the more expensive areas. However, conventional mortgages tend to have lower overall costs than other types of loans, even though their interest rates are generally higher.
On the downside, conventional loans have stricter credit score requirements, which are often 620 or above. They also have higher down payment requirements than government loans.
Overall, conventional loans are good options if you’re looking for income properties for sale and you have a high credit score and the money to make a sizable down payment.
2. Government-Insured Mortgages
Unlike the previous loans, government-insured mortgages are provided by one of the three US government agencies: the Federal Housing Administration (FHA), the US Department of Agriculture (USDA), and the US Department of Veterans Affairs (VA).
Each of these departments provides its own type of mortgage loan to US citizens who qualify for that type of loan.
- FHA mortgage: This type of home loan is designed to help first-time homebuyers buy a property without being subjected to strict requirements, such as those by private lenders. The FHA loan will typically require a credit score of 580 to get the maximum of 96.5% financing, which means you only need to pay a 3.5% down payment with that credit score.
- USDA mortgage: This type of loan is provided to homebuyers who wish to own a property in a rural location that is within the USDA-eligible areas list. USDA loans may not require a down payment if the borrower has a low income.
- VA mortgage: This type is provided to current members of the US Army, veterans, and their families. It does not come with a down payment requirement or mortgage insurance.
Pros and Cons
While each of these types of mortgages has its own pros and cons, government-backed loans generally have certain advantages. It is generally easier to qualify for a government loan than for a conventional loan. Additionally, the credit score requirements for these mortgages are much more relaxed and don’t require a large down payment.
However, they also come with several drawbacks. The biggest disadvantage of government-backed loans is that they may require mortgage insurance premiums, especially in the case of FHA loans.
In addition, the loan limits on an FHA loan are lower than conventional loans, which will limit the inventory that you can potentially buy from.
Overall, it is trickier to use a calculator for a government-backed loan that has mortgage insurance on it since it is an extra cost that you will need to factor in.
Types of Mortgages – Interest Rate Payments
The other way to distinguish types of mortgages, especially when using a calculator, is to do so based on the loan’s interest rate over its lifetime.
Before moving on, it is important to point out that the duration of a loan can be decided by the lender, but most typical mortgages come in terms of either 15 or 30 years.
When it comes to the types of interest rate payments that real estate mortgages offer, there are two types that are very common:
A fixed-rate mortgage has a fixed interest rate over its lifetime. It means that the interest rate at which you take the loan will not change for the entire duration of the loan, and the monthly payments you make will always stay the same.
This type of loan is the easiest to calculate when planning for an investment, and it can be easily calculated with a simple mortgage calculator. However, the downside of this loan is that it will generally have higher interest rates than the second type of mortgage I will talk about.
Since 30-year fixed-rate mortgages are very common, the interest rate that you would incur over such a long duration can be substantial.
Fixed-rate loans are popular among homebuyers who want to live in the property for several years and want to avoid potential changes to their monthly payments for that duration.
In contrast, an adjustable-rate mortgage has a monthly payment plan that may change over the lifespan of the loan.
Typically, the interest rates will go up or down depending on the market conditions. However, most mortgages of this type will have a fixed interest rate for a set duration at the start before the rate begins to change at certain integrals.
For example, an adjustable-rate mortgage may have a fixed interest rate for the first seven years, and then it would start adjusting its interest rate every six months until the end of its lifespan.
Generally, this type of mortgage is considered somewhat risky, as the interest rates can increase beyond what you can afford in the long run. However, since the overall interest rate is lower than a fixed-rate loan, investors often prefer an adjustable-rate mortgage.
In fact, many strategies that revolve around refinancing, such as the BRRRR strategy, will often prefer adjustable-rate mortgages because you can practically avoid having to pay the higher interest rates by constantly remortgaging before the initial period ends.
How to Calculate Your Mortgage Payments
Now that you know what the different types of mortgages are, let’s talk about how a mortgage is calculated. When calculating the amount of monthly interest rate, the calculation is fairly simple:
You divide the annual interest by 12, and you multiply by the mortgage amount to get your monthly interest rate.
For example, if your annual interest rate is 4%, your monthly interest rate would be 0.33% (0.04/12 = 0.0033).
However, when calculating the monthly mortgage payments, things get quite complicated. Even for a fixed interest rate mortgage, investors would typically use a simple mortgage loan calculator to get a quick result.
So, it is not surprising that other types of mortgages would require more sophisticated calculators to make the whole process easier for homebuyers and investors.
Why Investors Need a Mortgage Calculator
When it comes to finding a good calculator, it all depends on the type of info that you want to get. For example, a mortgage amortization calculator will tell you how long it will take for your mortgage to amortize, and that will be the main angle of the output that it provides.
However, a mortgage payoff calculator will also need to have enough options to include all types of mortgages. The more you can customize the tool, and the more input it allows you to give, the more accurate the results it is going to give you. It is mainly because most types of mortgages involve additional costs that homebuyers can often forget about, such as insurance costs and taxes.
Of course, if you’re going to use a mortgage calculator with taxes, then it will have to account for your location and the taxes that may apply to your specific case.
With all that in mind, there are many different types of calculator tools online, each comes with its own advantages and disadvantages. But if you’re looking for a platform that includes a calculator and will also help you find income properties for sale, we have the right tool for you.
Mashvisor’s Mortgage Calculator – What Makes It Better?
Mashvisor is a real estate platform that can help investors find an investment property based on actual data and analytics. The platform provides all the tools you need, including a mortgage calculator and a rental property calculator that accounts for your mortgage payments.
It means that, in addition to helping you find the best place to invest in real estate, the tool will calculate the return on investment that a rental property will have after calculating your mortgage payments.
By using metrics such as the cap rate and the cash on cash return, the tool can significantly reduce the amount of time needed to analyze the long-term outcome of investing in any rental property.
A Flexible Mortgage Calculator
Unlike other calculators, Mashvisor’s calculator allows you to choose the type of mortgage that you want to use. It includes both fixed and adjustable-rate mortgages, and you can pick a 15- or 30-year duration.
While the fixed-rate option acts as a simple mortgage calculator, the adjustable-rate calculation is quite complex to be done by hand. Since the tool is connected to the rental property calculator, any input you make in the mortgage section will immediately be reflected on the property’s analytics page. It includes the rate of return on investment, the monthly expenses related to owning the property, and the long-term payback analysis of your investment.
All of the above features make Mashvisor the best when it comes to analyzing your purchase before making it.
A mortgage calculator is an essential tool that every investor needs.
If you’re looking to invest in real estate or buy a home, chances are you’re going to need a mortgage. Depending on the type of mortgage you end up using, you’re probably going to want to use a mortgage payoff calculator to be sure about your financial future.
If that’s the case, you’re already in the best place to start. With Mashvisor, you can access the best calculator tool that will handle all the calculations you need to make sound investment decisions.
To start using our real estate investment tools today, sign up for a 7-day free trial, followed by 15% off for life on your Mashvisor subscription.