You might be thinking about buying a house or getting a better deal on the one you already have. Some questions come up because of this choice: Would you be willing to lend me money? What kind of payment can I look forward to? If I pay off the loan early, how much money will I save? We’ll break down the method for you in this piece so you can figure out your mortgage rate.
How to break down mortgage payment
Many things affect how much your monthly mortgage payment is, such as the loan amount, interest rate, loan time, and others. Let’s see what we can expect.
Amount of loan
If you want to buy a house, you should put in the prices of the homes you like and take away the amount of your down payment. If you’re far enough along, you might also be able to add any prices that are being made to the list. On a refinance (sometimes called a “refi”), write down how much you expect to owe when the deal is done.
Rate of interest
Your interest rate has a big effect on how much your monthly mortgage payments will be, but a lot of that depends on things in the market that you can’t change. Don’t forget that most of your first mortgage payment will go toward interest.
Don’t use the yearly percentage rate (APR) to figure out how much your payment will be. Instead, use the base rate. Because closing costs aren’t part of your regular payment, you use the lower base mortgage rate. It’s still helpful to know the APR, but it’s more important to think about the total cost of the loan than your monthly payments.
Loan length
You have this long to pay back the loan. When the time is longer, like 30 years, the payment is smaller, but more interest is paid. When the time is shorter, like with a 15-year mortgage, the payments are higher and the interest is paid less.
Insurance for mortgages
PMI stands for private mortgage insurance. If your down payment is less than 20%, you will need to pay this every month. The amount of this payment is a portion of the loan amount. It saves the lender in case you don’t pay back the loan. This is what the rate is based on:
- A down payment or the amount of stock
- Score on credit
- Type of loan
- Occupancy
If you own a one-unit main home, you can usually ask for removal once you have 20% equity.
When you get a loan from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA), you may have to pay mortgage insurance or guarantee fees upfront and every year for the life of the loan, depending on the type of loan and the amount of down payment or equity you already have. Mortgage insurance fees may be added to the loan amount based on the size of your down payment.
Taxes on property
Property taxes are often included in your mortgage payment, so having a pretty good idea of how much it will cost will help you understand it better. No matter if you have a trust account or not, these costs need to be added to your total cost of ownership.
Insurance for homeowners
To protect their property, mortgage lenders will make you get homeowner’s insurance. The whole fee is paid for each month if you have a trust account. You still need to count this as a property cost even if you don’t.
Fees for Homeowners Associations (HOA)
Even if you have a trust account, these aren’t usually part of your regular payment. But it’s important to remember about these yearly and monthly fees. The fees you pay to the homeowners association (HOA) can also affect the loan amounts you can get to buy or sell a house.
How to figure out a mortgage payment
There are two ways to figure out how much your monthly mortgage payment will be. It’s possible to use an equation to figure it out by hand, or you can use a mortgage payment tool.
Fill out the formula
To find out your mortgage rate, as we already said, a mortgage estimator is the best way to go. Being aware of the formula can help you understand how changing one variable affects the other parts of the equation. Let us quickly look.
M = [I(1 + I)N] / [(1 + I)N − 1]
This method will help you figure out how much your monthly mortgage payment will be based on the loan balance and interest, as well as any taxes, renters insurance, and HOA fees. But if it looks a little scary, you’re probably not the only one. To make it easier to understand, let’s break it down variable by variable:
- M = Payment every month: This is what you need to solve for.
- P = Principal amount: This is how much you still owe on the loan and what you want to pay off.
- I = Interest rate: Don’t forget to use the base interest rate instead of the APR. You should also split the mortgage interest rate you’re charged by 12 to get the monthly interest rate. This is because the interest rate you’re charged is an annual rate that shows how much you should pay each month.
- N = Number of payments: This is how many times you have to pay back the loan. For example, if you pay a mortgage every month for 30 years, that’s 360 payments.
You can also compare different payment options, such as interest-only payments versus fully amortizing loans, once you have your own method set up.
As we already said, this includes capital and interest. Once you know how much your taxes and insurance cost, you can add them to the amount to get your monthly payment. These four payment factors, which are sometimes shortened to “PITI,” will help an investor decide if you can get a loan. When homeowners association fees are taken into account, the word changes to “PITIA,” where “A” stands for “association dues.”
Fill out a spreadsheet
When it comes to certain scenarios, a worksheet method could be useful. Mortgage tools, for example, usually work with the idea of a fixed-rate mortgage. If you have an adjustable-rate mortgage (ARM), the rate changes over time. You can use the PMT tool in Microsoft Excel to set up a repayment table. Then, when the interest rate changes, you can change the formula so that the rate and time left match the new terms.
Fill out a mortgage calculator
A mortgage calculator is usually better than a regular calculator for figuring out your mortgage payment because it’s hard to enter the formula correctly in a regular calculator.
You can figure out your mortgage payments much faster and without having to guess when you use a mortgage tool. There are different kinds of mortgage tools, so it’s important to know what each one does so you can match your needs with the right one.
