Mortgage Affordability Calculator
How to Calculate Mortgage Payment
Purchasing a home is a massive expense, perhaps the biggest that you will make in your entire life. Most buyers cannot afford to pay the full price of a home upfront, and even those that can afford it may choose not to for one reason or another. A mortgage loan is a tool that makes buying a home possible for almost anyone. There are several different types of loans that you can apply for, including:
- Conventional loans
- Federal Housing Administration loans
- VA loans
- Jumbo loans.
Whether or not you qualify for these variations depends on factors like lifestyle, monthly income, career, and cash reserves.
How a Mortgage Works
A mortgage lender is an entity that gives out a loan for a buyer to be able to afford the full home price based on the loan term. They enter into an agreement with the borrower that requires the buyer to pay a monthly payment to pay back the loan principal and interest over a certain period, usually 15, 20, or 30 years. The interest rate allows the lender to make money off of the transaction while the buyer gets to acquire the home even if they cannot afford the listing price. Variables of the loan are if private mortgage insurance is required, down payment, interest rate, purchase price, loan amount, closing costs, and the type of loan whether a fixed rate mortgage or an adjustable. All of those things will be entered into a mortgage calculator to determine the monthly payment.
There are two parts to every home loan amount; the mortgage principal and interest. The principal is the amount that is needed to cover the price of the home after the down payment. Interest is the additional cost that depends on the interest rate laid out in your contract with the lender. In general, long-term mortgages have the borrower pay higher portions of the total interest at the beginning of the loan term with less of those monthly payments going toward the principal loan. The longer you own the home, the more you pay toward the principal with each monthly mortgage payment. Other payment models are available, so this is not always the requirement.
Calculating Monthly Mortgage Payments
Home's Purchase Price
Obviously the purchase price of the home is the most significant factor in calculating monthly payments since it directly determines the total loan amount. The higher the home price, the higher your monthly payments will be.
Down Payment Amount
A down payment is the amount of money you spend on the price of the home upfront. For any given loan term period, the larger the down payment, the lower your monthly payments will be. Saving for a sizeable down payment is one of the most important ways to prepare for buying a home so that you can reduce the monthly payment. Additionally, most buyers strive to pay a 20% down payment amount so that they will not have to pay for private mortgage insurance (PMI), at least for a conventional loan amount.
Private Mortgage Insurance (PMI)
If you are unable to cover a 20% down payment on a conventional loan, then you will have to pay private mortgage insurance premiums in your monthly payment. Mortgage insurance protects lenders when they take on riskier borrowers. Since you were unable to cover a large enough down payment, the lender charges this extra fee for mortgage insurance as a safety net in case you default. This is not the same thing as homeowner’s insurance, but it is an additional cost in your monthly mortgage payment that needs to be accounted for.
A homeowners insurance policy is almost always a requirement for owning a home. Since the credit union, bank, or mortgage lender has a financial stake in your home, they want to know that it is protected in the event of damage or an accident. Homeowner’s insurance is another cost that is calculated with the mortgage payment formula, and this rate is based on the type of home, construction date and materials, location, and other factors. When you apply to get pre-approved for a loan, you often have to provide a homeowner’s insurance quote.
Property Tax Monthly Payments
Property taxes are another factor that may affect your monthly mortgage payment. A property tax is levied by the local government to make homeowners help pay for services like schools, public transportation, infrastructure, and more. There are multiple ways to pay property taxes, and it all depends on your local municipality. Some may send you an annual tax bill, in which you will pay the full amount once a year. You could also pay a monthly property tax. With an Escrow account for your mortgage loan, property taxes are applied to your monthly payment and then taxes and insurance are deducted directly from the Escrow account whenever payments are due. With this model, your monthly mortgage payment is affected property taxes.
If your home is part of a homeowner’s association, then you will have to pay HOA fees along with your monthly mortgage payment. HOA fees may cover services like garbage disposal, snow removal, lawn care, and other offerings that a homeowner’s association provides.
Interest rates help determine the total cost of your mortgage loan. Some factors that affect the interest rate you will receive include your credit report, the current real estate market, and the type of loan. As mentioned before, how much of the monthly cost goes toward interest versus the principal can change. If you are borrowing money when the market favors buyers, you can lock in a lower interest rate with a fixed interest rate loan. If you choose an adjustable rate mortgage, your monthly interest rate may fluctuate based on the market, resulting in changing monthly mortgage payments. You could even opt for an interest-only loan where you only pay interest for a few years at the beginning, resulting in a smaller monthly mortgage payment.
There are other factors at play that can have an effect, such as the number of payments, closing costs (attorney fees, real estate agent fees, fees for private lenders, etc), loan type, and debt-to-income ratios.
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