If you've decided to buy a home or refinance your mortgage, you may be puzzled by the different mortgage rates you've seen advertised for home loans. You're not alone: Many home buyers and homeowners are confused when they discover they don't qualify for these rock-bottom interest rates.
The reality is that the interest rate you'll pay on a loan is determined largely by your own personal situation. Variables include the loan term, the property location, the loan amount, and your loan-to-value ratio.
It's easy to determine mortgage interest using:
- an online mortgage calculator
- a personal calculator
- or an Excel spreadsheet
Let's examine them, one-by-one:
Use an Online Finance Tool
LendingTree's Mortgage Payment Calculator will crunch the numbers for you and determine monthly payments. The free online tool calibrates monthly estimates for PMTI: principal, interest, property taxes and homeowners insurance. To use the tool, simply input the home's purchase price, location (zip code), the expected down payment, credit score, and interest rate. In addition to providing results on PMTI, the payment calculator will deliver current mortgage options that can save you money.
Calculating Total Interest Using Loan Payments
Homeowners don't need a scientific calculator to determine the amount of interest. The simple interest formula is good for approximations. For example, say each month's principal is $100. The rate is .06 and it's charged for one month:
- Interest = Principal x rate x time
- Interest = $100 x .06 x 1
- Interest = $6
To calculate your total interest, multiply the number of payments over the term by the monthly payments. Then subtract the principal borrowed for the home.
Using Excel to Calculate Your Interest
The San Francisco Chronicle offers straightforward instructions on using an Excel spreadsheet:
- Open a new Excel workbook and create three cells. In A, type the word "principal"; in B, type "rate", and in C, type "months". Now enter the data into each field: in B, just type in the number for the rate, not the percentage sign (%). In C, convert the term to months (example: on a 15-year mortgage, type 180).
- In cell A4, enter this formula: =B2/1200. This converts the annual interest into a monthly rate.
- In cell A5, enter: =(1+A4)^B3. This calculates changes over time based on compounded interest.
- In cell A6, enter: =(A4*A5)/(A5-1). The formula creates a multiplier to calculate monthly payments.
- In cell A7, enter: =A6*B1. This formula applies the multiplier to the principal in column A.
- In cell A7, click the right-click button on the mouse to open a format menu. Under "format cells", choose "currency", set the decimal place to "2", and choose the dollar sign ($) in the currency symbol. The cell now shows the mortgage payment, broken down into principal, interest, and term.
Are You Paying Too Much Interest?
Mortgage interest rates are always in flux. That's why consumers should lock in rates when they find an attractive offer. It's equally smart to compare current mortgage rates with the interest on an existing mortgage. Favorable rates can make a big difference in monthly payments, but in uncertain times, rates can change. For example, Mortgage News Daily reported on April 25, 2017, that rates have moved upwards in reaction to "geopolitical flash points".
Find an effective strategy for comparing loan offers at LendingTree.
Refinancing Your Mortgage
If the current rates are appealing, refinancing a mortgage is a solid way to lower the interest rate, lower monthly payments, adjust the loan term, or convert a variable rate to a fixed-rate loan. Moreover, it can be a means for converting home equity to cash. LendingTree's Refinance Calculator is another useful tool for comparing free loan offers or exploring the difference between a refinance offer and your current mortgage.