{"id":25148,"date":"2021-06-30T15:16:19","date_gmt":"2021-06-30T22:16:19","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=25148"},"modified":"2021-12-15T14:54:58","modified_gmt":"2021-12-15T22:54:58","slug":"buyer-how-to-calculate-mortgage-payment","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-how-to-calculate-mortgage-payment\/","title":{"rendered":"How to Calculate a Mortgage Payment When You\u2019ve Never Made One"},"content":{"rendered":"

It\u2019s no secret that there\u2019s lots to consider before buying a house, but one of the trickiest points for first-time buyers is often figuring out how to calculate a mortgage payment<\/a>.<\/p>\n

Sure, there are plenty of payment calculators available online (just Google \u201cmortgage calculator\u201d and you\u2019ll be spoiled for choice), but mortgage payments contain several variables. It\u2019s important to know what you\u2019re getting into \u2014 both for financial awareness and your own peace of mind during what can be a long, stressful process.<\/p>\n

With the help of HomeLight Home Loans<\/a> expert Richie Helali, we\u2019re going to review everything that goes into a mortgage payment (and what doesn\u2019t!). We\u2019ll share tips on how to estimate those costs, as well as how to figure out exactly<\/i> what you\u2019ll be paying each month after you\u2019ve closed on your new home.<\/p>\n

Ah, if only it were as simple as dividing the purchase price by the length of your loan term<\/a> and calling it a day…<\/p>\n

Here\u2019s what you need to be aware of when calculating a mortgage payment.<\/p>\n

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Source: (GotCredit<\/a> \/ Flickr via Creative Commons Legal Code<\/a>)<\/figcaption><\/figure>\n

1. Principal and interest<\/h2>\n

The majority of your mortgage payment will go toward principal and interest<\/a>. The principal is the amount of money you\u2019ve borrowed, while interest is essentially the fee you pay in order to borrow that money.<\/p>\n

Depending on the type of interest you choose, you\u2019ll have either a fixed-rate<\/a> or an adjustable-rate<\/a> mortgage \u2014 and in either case, the interest rate is determined by your credit history, the amount you\u2019re putting down on the home, and current market rates<\/a>, among other factors.<\/p>\n

\u201cIt\u2019s important to note that mortgages, similar to car loans, are amortized,\u201d says Helali. \u201cWhen you make that first mortgage payment, a large portion is going to go toward interest.\u201d<\/p>\n

What is amortization?<\/h3>\n

Amortization may sound scary or seem as though the loan is structured to benefit the lender, but it\u2019s really just another word to describe a payoff schedule.<\/p>\n

Each mortgage payment chips away at your principal balance, but in the beginning of an amortized loan, you\u2019ll pay more toward interest. Over the life of the loan, this shifts to more of your payments being allocated to your principal. Let\u2019s take a look at an example using an amortization calculator<\/a>:<\/p>\n

Say you\u2019re purchasing a home for $250,000 with a 30-year, fixed-rate loan at 3.5% interest.<\/p>\n

Your monthly payment (for principal and interest only, that is \u2014 more on the other factors shortly) will be $1,122.<\/p>\n

The first mortgage payment will allocate $729 to interest, and $393 to the principal balance.<\/p>\n

After 20 years, your payment will send $333 toward interest and $789 to principal. It\u2019s a gradual shift, but as your principal balance decreases, there\u2019s less of a foundation on which interest accrues.<\/p>\n

To expedite the equity-building process and ultimately save money on interest, you can kick a little extra cash toward your principal balance. Whether you pay an additional $50 each month or make one extra mortgage payment each year, it all adds up.<\/p>\n

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Source: (Alexander Schimmeck \/ Unsplash)<\/figcaption><\/figure>\n

2. Taxes and insurance<\/h2>\n

Taxes and insurance are the second category of what constitutes your mortgage payment, but they\u2019re easily overlooked during the excitement of house-hunting.<\/p>\n

\u201cOne thing that a lot of people do is \u2014 let\u2019s say they\u2019re renting an apartment for $2,500 per month and then they find a house \u2014 they look up a mortgage payment calculator and say, \u2018Wow, my payment is only going to be $2,100 per month. If I buy this place and put a little money down, I\u2019m going to save myself $400 each month,\u201d Helali shares, warning that these calculators don\u2019t tell the whole story.<\/p>\n

Your property taxes and homeowner\u2019s insurance will also<\/i> be rolled into your monthly mortgage payment on top of the number you\u2019re calculating online, and later disbursed from an escrow account<\/a> when property taxes are due each year.<\/p>\n

These costs aren\u2019t as easy to estimate because property taxes vary by state and county, and homeowner\u2019s insurance<\/a> rates vary based on location, the size and age of a home, your credit and claim history, and much more. If you\u2019ve ever insured a car before, you\u2019ll know that the process is not as straightforward as buying a pair of shoes \u2014 and homes are even more nuanced.<\/p>\n

How to calculate property taxes<\/h3>\n

Your best bet for estimating property taxes \u2014 aside from asking your agent<\/a> or lender \u2014 is to pull up the tax assessor\u2019s office for the county where your potential new home is located.<\/p>\n

\u201cEven if you\u2019re looking [for a house] in multiple different counties, taxes are likely going to be a little different,\u201d says Helali. \u201cLook at the county website to get an idea of what the tax rate is. Or, you can just talk to a loan officer.\u201d<\/p>\n

Don\u2019t be shy when it comes to asking questions.<\/p>\n

How to calculate homeowner\u2019s insurance<\/h3>\n

According to Insurance.com<\/a>, the average annual cost for homeowner\u2019s insurance on a home with $300,000 in dwelling coverage, $300,000 in liability coverage, and a $1,000 deductible is $2,305 per year. That\u2019s an additional $192 per month to add to your initial mortgage payment calculation.<\/p>\n

But because so many factors go into determining insurance rates, if you\u2019re serious about knowing exactly how much you\u2019ll pay, it\u2019s best to pick up the phone and speak directly with an insurance agent.<\/p>\n

If you already have auto or renter\u2019s insurance, your current provider may be a good place to start. You can also \u2014 you guessed it \u2014 ask your agent or lender if they have an insurance agent to recommend.<\/p>\n

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Source: (Kenrick Baksh \/ Unsplash)<\/figcaption><\/figure>\n

3. Mortgage insurance<\/h2>\n

Your loan may be subject to mortgage insurance (MI<\/a>) if you\u2019re putting down less than 20% of the purchase price on a conventional loan, or if you\u2019re taking out an FHA<\/a> or USDA loan.<\/p>\n

MI serves to protect the lender if a borrower defaults on their mortgage.\u00a0 Defaulting on your loan will generally result in a foreclosure<\/a> where the bank will sell your house in an effort to recoup their losses. MI is designed to make up the difference if the home does not sell for enough to cover the outstanding mortgage and other lender losses.<\/p>\n

While mortgage payment calculators don\u2019t usually account for MI, if your prospective loan is a candidate for this added expense, your lender will certainly let you know.<\/p>\n

The cost for your mortgage insurance policy is \u201cbased on factors like the state that the property is in, your credit score, and level of down payment,\u201d says Helali.<\/p>\n

Different banks and financial websites have varying ranges of MI estimates, but it\u2019s safe to assume you\u2019ll pay somewhere between 0.25% and 1% of your total mortgage amount annually, broken into monthly installments and included in your mortgage payment.\u00a0 Some lenders also offer what is called \u201clender-paid mortgage insurance,\u201d where your lender will pay the premium for the mortgage insurance in exchange for a slightly higher interest rate.<\/p>\n

The good news here (if there is such a thing) is that once you\u2019ve paid down your loan to where the principal balance is below 80% of the home\u2019s value, you can request that the MI be cancelled if you have a conventional loan (FHA and USDA loans have their own mortgage insurance rules). Or, the lender will automatically drop the insurance when you reach 22% equity. But, once again, talk to your lender for more clarification.<\/p>\n

What\u2019s not<\/i> included in a mortgage payment?<\/h2>\n

At this point, you can be certain that principal, interest, property taxes, homeowner\u2019s insurance, and borrower-paid mortgage insurance (if applicable) are the definite<\/b> elements of your monthly mortgage payment.<\/p>\n

HOA fees are solidly in the maybe <\/b>category.<\/p>\n

If the home you\u2019re eyeing belongs to a homeowner\u2019s association<\/a>, be aware that HOA dues<\/a> will be included when your lender calculates how much they believe you can afford. While HOA dues are generally not included with your mortgage payment, they will be calculated as part of your expenses, and you will have to budget to ensure you pay these dues.<\/p>\n

This isn\u2019t always the case, though. Some HOAs collect dues on a quarterly or annual basis, while others are a fixed monthly fee. Be sure to carefully read the covenants, conditions, and restrictions (CC&Rs) for the association to understand how and when you\u2019ll be expected to pay your dues.<\/p>\n

So, what expenses are not <\/b>likely to be included in your mortgage payment? Suffice it to say: Everything else. Welcome to homeownership!<\/p>\n

But in all seriousness, calculating your mortgage payment should not be the only budgeting you do prior to buying a house. You\u2019ll be on the hook for maintenance<\/a> expenses, repairs, landscaping<\/a>, and the cost of any upgrades to the property.<\/p>\n

It\u2019s important to ensure that you won\u2019t be stretched to your last possible dollar each month when you own a home.<\/p>\n

\u201cThe important thing to really understand is people staying within their budget,\u201d says Ed Kaminsky<\/a>, a top Los Angeles-based real estate agent with 34 years of experience. When you\u2019re estimating your mortgage payment, a solid rule of thumb is to stay under one-third of your gross income, which should encompass your whole payment.<\/p>\n

In other words, if you\u2019re earning $6,000 per month, aiming for a mortgage payment of $2,000 or less is ideal. In the eyes of your lender, you\u2019ll be able to comfortably afford your monthly payments (as long as your other monthly debt payments aren\u2019t too high). And \u2014 personal budgeting and lifestyle decisions aside \u2014 you\u2019ll theoretically have enough cash available each month to cover unexpected expenses, or to be able to save up for larger home improvement projects.<\/p>\n

Other costs you\u2019ll be responsible for out-of-pocket include the deductible on your homeowner\u2019s insurance in the event of a claim, and, in most cases, flood insurance. Flood insurance is required in some areas and highly encouraged in others, and while it\u2019s sometimes possible to include the cost in your mortgage payment, these dues are usually a lump-sum payment situation.<\/p>\n

\u201cI\u2019ve seen different policies in different places, and flood insurance isn\u2019t necessarily all that expensive anyway \u2014 but it\u2019s something you can ask your insurance agent about,\u201d says Helali.<\/p>\n

He also notes that since fire insurance may be required in areas at high risk of wildfires, (certain places in Hawaii even call for lava insurance<\/a>), it\u2019s worth asking around about any special insurance requirements or recommended coverage you may not be aware of for your region.<\/p>\n

As ever, your real estate agent and lender are great places to start, and your insurance agent can answer any lingering questions and provide quotes.<\/p>\n

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Source: (Mediamodifier \/ Unsplash)<\/figcaption><\/figure>\n

For math enthusiasts only<\/h2>\n

If you\u2019re the type who loves crunching numbers as a hobby or thinks of online calculators as a shortcut, there is a complicated formula you can use to do the equivalent math by hand:<\/p>\n

M = P [ I (1+I) ^ N ] \/ [ (1+I) ^ N – 1]<\/b><\/p>\n