All you have to do is log on to the Internet to be bombarded by opportunities to acquire a new mortgage or refinance your existing home. The rates posted sound great, but bewildering. A mortgage calculator is an invaluable tool when it comes to assessing the various mortgages available to you. While the hype that accompanies each kind of mortgage tells you the technical information, the mortgage calculator will show in actual terms what this means as regards your monthly finances.
Fixed Rate Mortgage (FRM)
The fixed rate mortgage probably financed your grandmother or mother's house immediately post World War II. With a fixed rate mortgage, you pay the same amount each month and work your budget around it. Every month is the same for the length of the loan. The interest doesn't change. Think of buying a car; this is it. No worries of interest rate fluctuations or inflation eating you alive.
With a simple mortgage calculator and the current average interest rate for fixed rate mortgages, you can quickly find your top buying price for a home. Unfortunately, the interest rates tend to be higher than for adjustable rate mortgages. If the interest rates drop, your payments will remain the same, unless you want to refinance. A refinance mortgage calculator can give you the information you need to decide about refinancing with a fixed rate mortgage with information about breakeven points.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage, no longer the new kid on the block, means that you will pay a different amount as the index to which it is keyed changes. If the index goes up, then your payment increases too. But, if it declines, then so does yours, sort of. With caps on payments and interests rate, lenders may recoup interest in some mysterious way if the interest rate declines. In weird fact, you may owe a larger payment with a decline in the interest rate. Usually, but not always, the rates on your loan may be adjusted annually, or every three or every five years. Using a mortgage calculator, even one designed for an ARM, can only give you a rough idea of what your payments might eventually. The large number of variables inhibits the investigation.
You need to find out what the most you could afford to pay each month would be, and then choose a house that will allow the interest rate to rise substantially. And, plan on working with your mortgage calculator on a regular basis and finding someone trustworthy who really knows what's going on.
Comparing the FRM and ARM
If you aren't sure about whether the initially lower, but more, risky adjustable mortgage, or the safer, more expensive fixed rate mortgage is for you, then use a comparative mortgage calculator such as the ARM vs Fixed Mortgage offered by The Mortgage Professor. He'll explain it in such detail that you'll know you'll never be sure. He also has many other calculators and articles for consumer use.
Other Types of Loans
If you qualify for any of these loans, use the mortgage calculator to see how they measure up against the more traditional ways of financing your home.
Use a mortgage calculator to input the same loan amount and calculate what the each of the interest rates offered on each of the above types of mortgage would translate to in monthly payment.