Shopping for a home is exciting — and possibly overwhelming. On one hand, it’s a chance to let your imagination run wild as you envision yourself in your dream home. On the other hand, there’s the cold reality of financing.
Fortunately, you don’t have to guess at how much house you can afford. Using a mortgage calculator for Colorado home buyers helps you understand what you’ll be paying for each month as a homeowner.
Here’s your complete guide to everything you need to know about your mortgage calculator: what numbers go in, what you learn about your budget, and how to plan accordingly.
Calculator Inputs: Know the Numbers
To get the best results with the mortgage calculator, you’ll need to do a little research for accurate inputs. For example, you can skim the online listings to get a sense of the average prices in your ideal neighborhood. It’s also a good idea to look up current Colorado mortgage interest rates to get a sense of what you may be offered by your lender.
Here are all the factors that your mortgage calculator considers:
- Home Price. This is the final price you actually pay for the home, which may differ from the asking price. It does not include closing costs, taxes, any other fees for inspections, and so on.
- Down Payment. This is the money you have saved to make an initial payment on the house. Traditional mortgages may require 20 percent of the home price as a down payment. But you can find Fannie Mae loans that allow a down payment as low as 3 percent.
- Mortgage Rate. This is the interest rate you’ll pay to the bank for the privilege of borrowing money. Mortgage interest rates in Colorado are always changing, but they’re often lower than the national average. The lower the interest rate, the less you’ll pay over the life of the loan.
- Loan Term. This is the length of time you have to pay off your home loan. Most people opt for a mortgage term of 30 years, but you can also easily find 10-, 15- and 20-year terms if you prefer.
- Annual Property Taxes. This is the amount of money per year that you pay to your county based on the value of your home and land. Colorado has some of the lowest property taxes in the Unites States. You may pay one-third to one-half of the national average, depending on your location.
- Annual Homeowners Insurance. This is the amount you pay to insure your home against fire, theft and other damages. Lenders typically require insurance to protect their investment in your property. Insurance will pay to rebuild or replace items in case of a disaster.
- HOA Fees. If you buy a condo or other property that has a Homeowners Association, you may be assessed an annual fee. This is common for condo owners who pay for shared expenses like landscape maintenance and repairs to common areas, such as the roof or a clubhouse.
How the Numbers Affect Your Monthly Mortgage Payment
Your mortgage payment has two parts: direct payments to the lender and escrow payments.
Direct payments are monies paid to your lender. These costs include:
- Mortgage Principal. This is the amount per month that goes to pay down the amount of the house you couldn’t afford. Early in the life of your loan, a small portion of your payment goes to principal (your debt), but the amount increases over time.
- Mortgage Interest. This is the amount per month that covers the finance charge (based on your interest rate). At the beginning of your loan term, most of your payments cover interest. Interest rates become smaller over time as principal payments rise. But they should always add up to the same monthly payment when put together.
Escrow, on the other hand, is an account that your lender manages on your behalf. They collect money in your mortgage payment and then forward the correct amounts to the county for taxes, insurers, and so on.
- Property Taxes. Many lenders divide your annual property taxes into 12 monthly payments that they add onto your mortgage bill. If they do, they will pay your property taxes for you, so you don’t have to worry about an extra bill.
- Homeowners Insurance. Likewise, your lender may collect your insurance payments in monthly installments from you and pay your insurer in full each year as the policy renews.
- PMI. Private mortgage insurance, is an additional fee you pay if you put forward a down payment smaller than 20 percent of the home price. This is typically calculated as a percentage of the loan amount, and is usually charged for the first five years of your loan term.
Some Mortgage Calculator Rules of Thumb
Having trouble understanding how different numbers influence the mortgage calculator results? Here are some rules to remember:
- The longer the loan term, the lower the monthly payment.
- The longer the loan term, the higher total interest you’ll pay over the life of the loan.
- The higher the down payment, the less interest you’ll pay over the life of the loan.
- The higher the down payment, the less PMI you’ll pay.
- The lower the interest rate, the less you’ll pay over the life of the loan.
- Property taxes and insurance costs can change from year to year. So, your lender may need to increase your monthly mortgage payment over time to cover additional escrow costs.
How Much House Can You Afford?
Once you use the calculator to get an idea of your monthly mortgage payment, it’s time for a reality check: Can you afford that much? The general rule is to keep your housing costs at 30 percent of your pre-tax income. That includes your mortgage payment plus money you pay for utilities and any repairs or maintenance.
To see if that amount works for you, do a trial run as you shop for your dream house. Take your total hypothetical mortgage amount, subtract your current rent, and put the difference into your savings account. If you can comfortably live without that money, you can handle your proposed mortgage. Best of all, you’ve also given your down payment piggy bank a boost, especially if you continue the experiment for several months.
The Bottom Line
Once you’re confident about your mortgage budget and know what you can spend on a house, you need a smart Colorado real estate agent to help you find the perfect property. Trust Peak Property Group to guide you through the process and get you settled into your dream home today.