How Much Will My Monthly Mortgage Payment Be?
Once you find the home you want to buy, it’s time to break down the costs to see how it will fit into your monthly budget. Many people turn to mortgage calculators for a quick answer, but they often get a vague estimation that doesn’t consider everything.
At OVM, we get many questions about how a mortgage payment works and what the magic number will be for each of our clients. Here are the key factors and tips you should know to help you understand how to calculate a mortgage payment accurately.
What Factors Affect My Monthly Mortgage Payment?
It all comes down to PITI – Principal, Interest, Taxes, and Insurance. All four breakdown the various components of your mortgage payment.
- Principal – This is the part of your mortgage payment that actually goes toward the loan’s balance. When you pay your principal balance, you’re paying the money back that you borrowed to pay your home.
- Interest – Interest covers the cost of borrowing the funds – your interest rate is the percentage of the loan amount that you will be charged monthly on top of the money you borrowed.
- Taxes – Local governments charge real estate/property taxes each year to help fund public service offerings. Your real estate taxes are typically rolled into your monthly mortgage payment and held in escrow until it’s time to pay them.
- Insurance – Insurance covers any policy that you will need to carry to protect your home (i.e., homeowners insurance).
- **Private Mortgage Insurance (PMI) – PMI is not apart of the PITI acronym. The reason being, PMI is not always necessary, but it’s a factor if you put down less than 20% when you purchase your home. Think of it as the “sometimes Y” of the vowel world.
As you can see, there’s more to a mortgage payment than meets the eye. Let’s get into some of the specific details that will play a role in the final number.
The home’s cost and your down payment amount ultimately determines your principal balance.
How Home Price Is Determined
Various factors determine the market value of your home and the final price tag. Before you begin shopping, prioritize the most important factors and get preapproved to keep your home price point within budget.
Down Payment Amount
Your down payment will also impact your principal balance. The higher the down payment, the lower amount you will need to borrow to cover your home’s cost.
For example, if you purchase a $300,000 home and opt to put down 5%, your remaining principal balance would be $15,000. Therefore, you would only need to borrow $285,000.
- 5% of $300,000 = $15,000
- $300,000 -$15,000 = Your loan amount of $285,000
Therefore, if your down payment were 20% versus 5%, you’d only need to borrow $240,000 versus $285,000. A lower principal balance will contribute to a lower monthly payment.
Aside from the overall cost of your home, your interest rate is going to play a part. Interest rates fluctuate frequently, and many factors are considered when determining your interest rate, including (but not limited to):
Property taxes are based on your home’s value and can vary widely by state and even county. New Jersey has the highest property tax rate at 2.21%, while Hawaii has the lowest at 0.30%. These disparities can make a big difference in your monthly mortgage payment, so it’s important to get an accurate estimate of how much tax you’ll need to pay.
In some cases, sale listings show property taxes that can give you an idea of how much you’ll pay in different neighborhoods. You can also use a mortgage calculator with taxes and insurance to help estimate your costs. But keep in mind that the best way to get up-to-date tax information is to contact your loan officer.
The average homeowner pays about $950 per year (about $80 per month) for homeowner’s insurance, but your rate could be higher or lower depending on several factors. States that are prone to natural disasters like tornadoes and hurricanes usually have higher than average premiums. Your insurance could also cost more if you need extra coverage for events like floods and earthquakes that are excluded from regular policies.
As mentioned above, natural disasters pose a big threat to homeowners. If you live in a flood zone, you will need to carry a flood insurance policy. The cost of a flood insurance policy varies according to:
- The amount/type of coverage you need
- Your location or which flood zone is assigned to your area
- The age and build of your home
Check out this article by Policygenius for more information. It includes a map that indicates the average flood insurance rates by state so you can get a better idea of the cost as it relates to your location. The average annual premium for the states that we are licensed to serve are noted below:
- Florida: $550.33
- Georgia: $684.36
- Maryland: $572.91
- North Carolina: $814.39
- South Carolina: $671.83
- Tennessee: $860.72
- Virginia: $736.86
Private Mortgage Insurance (PMI)
Private mortgage insurance will also be factored into the outcome of your monthly mortgage payment. Most lenders require private mortgage insurance if a borrower puts down less than 20% percent.
Private mortgage insurance makes it possible for loan officers to lend more to borrowers with less money down upfront. When a borrower puts less down, the risk factor goes up – the more money you have to borrow to cover the home’s cost, the higher the risk that you may default on your loan. Private mortgage insurance acts as a safety net to insure the funds that you will borrow.
The cost of PMI can range from 0.25% to 2% of your loan balance.
Keep in mind that PMI is not required if you are utilizing a VA loan or contributing more than 20% toward your down payment. There are also strategies that you can implement to eliminate PMI over time.
Two Ways To Calculate Your Monthly Mortgage Payment
If you’re wondering how to calculate your mortgage payment, you can start by using a mortgage calculator or you can manually calculate your payment.
Calculate Your Mortgage Payment Manually
To manually calculate your mortgage payment, you’ll need the following information:
- The total amount of your loan
- The interest rate
- The time you’ll have to pay your loan
The equation to calculate your mortgage is:
M is your total monthly mortgage payment.
P is the total principal of your loan.
R is your monthly interest rate.
To get what you’ll pay in interest each month, take your interest rate and divide that by 12, which covers the number of months in a year. For example, take your interest rate, which is 4.5%, divide it by 12, and you will get .375%.
N is the payments you’ll make over the lifetime of the loan.
To get the total time you have to pay your loan, take the number of years in your mortgage and multiply it by 12 for the months in a year. For example, if you have a 30-year term, you’ll have 360 months to pay it off with 360 payments.
If you want to get into the nitty-gritty and get even more detailed on your payments and schedule, you can use a mortgage amortization calculator.
Use a Mortgage Calculator to Estimate Your Mortgage Payment
It’s important to keep in mind that mortgage calculators can only give you a general idea of your monthly payments. Some calculators don’t include property taxes or various insurance types, making your payment look artificially low. Even calculators that provide tax and insurance estimates don’t usually take your location or loan type into account, so they could be off by a significant margin.
The best way to determine your mortgage payment is to ask your loan officer for a personalized estimate. We’ll be able to give you a figure that reflects your specific location, home type, and financial situation, allowing you to budget accurately for your home purchase. To get started today, give us a call or start your online application.
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