How to Calculate Monthly Mortgage
When it comes to owning a home, one of the most important things to consider is how much your monthly mortgage costs will be. Calculating and budgeting for these costs on an ongoing basis can help ensure you have an accurate financial plan and avoid getting in over your head.
Determine Your Mortgage Principle
The initial loan amount is referred to as the mortgage principal. For example, someone with $100,000 cash can make a 20% down payment on a $500,000 home but will need to borrow $400,000 from the bank to complete the purchase. Therefore, the mortgage principal is $400,000.
You'll pay the same amount each month if you have a fixed-rate mortgage. However, with each monthly mortgage payment, more money will go toward your principal, and less will go toward paying interest.
Calculate the Monthly Interest Rate
The interest rate is essentially the fee a bank charges you to borrow money, expressed as a percentage. Typically, a buyer with a high credit score, high down payment, and low debt-to-income ratio will secure a lower interest rate — the risk of loaning that person money is lower than it would be for someone with a less stable financial situation.
Lenders provide an annual interest rate for mortgages. If you want to do the monthly mortgage payment calculation by hand, you'll need the monthly interest rate — just divide the annual interest rate by 12 (the number of months in a year). For example, if the annual interest rate is 4%, the monthly interest rate would be 0.33% (0.04/12 = 0.0033).
Calculate the Number of Payments
The most common terms for a fixed-rate mortgage are 30 years and 15 years. To get the number of monthly payments you're expected to make, multiply the number of years by 12 (the number of months in a year).
A 30-year mortgage would require 360 monthly payments, while a 15-year mortgage would require exactly half that number of monthly payments, or 180. But, again, you only need these more specific figures if you're plugging the numbers into the formula — an online calculator will do the math itself once you select your loan type from the list of options.
Find Out Whether You Need Private Mortgage Insurance
Private mortgage insurance (PMI) is required if you put down less than 20% of the purchase price when you get a conventional mortgage or what you probably think of as a "regular mortgage." Most commonly, the lender will add your PMI premium to your monthly mortgage payments.
The exact cost will be detailed in your loan estimate, but PMI typically costs between 0.2% and 2% of your mortgage principal.
Frequently, PMI can be waived once the homeowner reaches 20% equity in the home. You also may pay a different type of mortgage insurance if you have another mortgage, such as an FHA mortgage.
Consider the Cost of Property Taxes
A monthly mortgage payment will often include property taxes, which are collected by the lender and then put into a specific account, commonly called an escrow or impound account. At the end of the year, the taxes are paid to the government on the homeowners' behalf.
How much you owe in property taxes will depend on local tax rates and the value of the home. Just like income taxes, the amount the lender estimates the homeowner will need to pay could be more or less than the actual amount owed. If the amount you pay into escrow isn't enough to cover your taxes when they come due, you'll have to pay the difference, and your mortgage payment will likely increase going forward. You can typically find your property tax rate on your local government's website.
Consider the Cost of Homeowners Insurance
Almost every homeowner who takes out a mortgage will be required to pay homeowners insurance — another cost that's often baked into monthly mortgage payments made to the lender.
There are eight different types of homeowners insurance, so when you buy a policy, ask the company about which type of coverage is best for your situation. For example, insurance policies with a high deductible will typically have a lower monthly premium.
With just a little bit of research into loan products and amortization calculators, anyone can easily estimate their annual homeownership expenses—from principal and interest payments to property taxes—and create a realistic plan for meeting their obligations as they progress through their loan term.
It is important to understand potential risks ahead of time, such as early termination penalties or hazard insurance kicking in after certain thresholds are exceeded, to ensure you have an accurate picture of your future financial obligations before committing long-term to any particular loan option or real estate investment strategy.
Conclusion
By budgeting wisely and planning ahead, homeowners can protect themselves from potential financial hardship down the line while enjoying all the benefits of owning a home. With just a little bit of research and preparation, you can calculate your monthly mortgage payments to ensure that you're making a wise investment in your future.