Amortization Schedule
The calculator uses the annuity method (fixed payment amortization), which is standard for US mortgages.
Monthly Payment Formula
Where:
- M = Monthly mortgage payment
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate / 12)
- n = Total number of months (years × 12)
Monthly Interest & Principal Split
Principal = Payment - Interest
New Balance = Balance - Principal
Key Insight: Early in the loan, most of the payment goes to interest. For a typical 30-year mortgage at 6.5%, approximately 80–90% of payments in the first 18 years go to interest. This reverses in later years.
References
Private Mortgage Insurance (PMI)
PMI is insurance that protects the lender if you default on a mortgage with a down payment less than 20%. The calculator implements CFPB-documented cancellation rules.
PMI Cancellation Triggers (CFPB Rules)
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1. Automatic Termination at 78% LTV
PMI automatically terminates when the loan-to-value (LTV) ratio reaches 78%. LTV = Remaining Balance / Original Home Value.
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2. Voluntary Cancellation at 80% LTV
Borrower can request PMI cancellation in writing once LTV reaches 80%, if payments are current.
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3. Midpoint Rule Termination
PMI automatically terminates at the loan midpoint (e.g., month 180 for a 360-month/30-year loan), regardless of LTV.
⚠️ Important: "Original value" = whichever is lower: contract sales price or appraised value at purchase. If the loan is refinanced, the definition resets to the new appraised value.
Reference
Mortgage Interest Tax Deduction (IRS Pub 936)
Homeowners can deduct mortgage interest paid during the tax year, subject to limits and the requirement to itemize.
Acquisition Debt Limits
| Period | MFJ Limit | MFS Limit |
|---|---|---|
| After 12/15/2017 | $750,000 | $375,000 |
| Before 12/15/2017 | $1,000,000 | $500,000 |
Calculation: Deductible interest = Total interest paid × (Acquisition debt limit / Home price)
Other Deductible Items
- ✓ Property tax: Deductible up to $10,000/year (SALT cap, combined with other state/local taxes)
- ✗ Mortgage insurance premiums: NO LONGER DEDUCTIBLE (expired)
- ✓ Points: May be deductible in year paid (if conditions met) or amortized over loan life
💡 Itemization: Deductions only apply if you itemize (vs. taking standard deduction). The calculator assumes itemization; your actual benefit depends on your total itemized deductions.
Reference
Rent Scenario: Opportunity Cost
The calculator models what happens to the money you would invest instead of spending on a home purchase (down payment + closing costs).
Invested Capital
Monthly Compound = Capital × (1 + r/12)^month
Where r = Annual investment return rate (default 7%).
Key Assumption: The down payment and closing costs earn returns at the specified rate (stock market, bonds, etc.). This is added to monthly rent to show the complete cost of renting.
Why This Matters
Simply comparing rent to mortgage payment is incomplete. The real decision is:
- Buy: Pay mortgage + taxes + insurance + maintenance, but gain equity + appreciation + tax benefits
- Rent: Pay rent + insurance, but invest the down payment at market returns + keep liquidity
Break-Even Analysis
The calculator determines when buying becomes financially advantageous vs. renting by comparing net positions each month.
Comparison Metrics
Rent Position = Invested Portfolio - Cumulative Rent Paid
Break-Even = First month where Buy Position > Rent Position
The calculator also shows which scenario wins at the final month of the loan term.
Limitations & Disclaimers
- ✓ Best for US tax law (2024). Tax rules vary by state/country.
- ✓ Assumes fixed-rate mortgage. ARMs, hybrid products not modeled.
- ✓ Simplified tax modeling. Assumes itemization; actual deductions depend on your full tax picture.
- ✓ Maintenance costs estimated. Actual costs vary by home age, location, and condition.
- ✓ Market returns assumed constant. Real markets fluctuate; past performance ≠ future results.
- ✓ Not personalized. Does not account for your credit score, specific rates, local market conditions, or life changes.
⚠️ DISCLAIMER: This calculator is for educational purposes only and does not constitute financial, tax, or legal advice. Consult a financial advisor, tax professional, and real estate agent before making decisions. The authors assume no liability for errors or omissions.