The calculation of your monthly mortgage payment has many inputs that effect the amount you will be paying.
What affects a mortgage payment?
- How much your home costs.
- The time duration of your loan.
- Your down payment.
- Your interest rate.
- Home insurance.
- Property taxes.
- If you need private mortgage insurance.
- Home association fees.
How much your home costs.
This first input of course is the price you are paying for your home. Times in the housing market that favor the sellers due to low interest rates and high demand on the buy side with low supply on the sell side usually lead to higher prices. Sometimes the best time to buy a house is when interest rates are higher and you can refinance your mortgage later when interest rates come down.
Where you buy and how in demand the area is will be a primary factor in the cost of your home. Many people buy in counties outside the cities where they work and commute in to get more house for their money. However, your home price is just one of many factors in the cost of the monthly payment.
The time duration of your loan.
There are huge variances between 15-year and a 30-year time duration mortgages. In a 15-year mortgage half your payments have been completed in seven and a half years while in a 30-year mortgage you have 22.5 years left to go at that point. However, 30-year mortgages are far cheaper in payments but cost more in interest over the duration of the loan. Most first time homebuyers do 30-year mortgages just to get into the house they want with payments they can afford. People that choose 30-year mortgages can refinance to 15-year mortgages later as their careers advance or make an extra payment each month to have an earlier pay off date.
Your down payment
Your down payment cuts down the amount of capital you need to finance as principle on the loan. If it’s high enough it can also eliminate the need for private mortgage insurance.
Your interest rate
The interest rate on your mortgage is the amount the bank sets based on the type of mortgage you get and the current interest rates in the market. Mortgage rates are correlated to and track the yield on 10-year U.S. Treasury bonds. Bond investors and traders move bond prices that affect bond yields making them higher at lower bond prices and lower at higher bond prices this causes mortgage rates to move. While the Federal Reserve doesn’t directly set the interest rates mortgage borrowers pay directly, its interest rate policy does influence interest rates on mortgages.
Home insurance must be carried with every mortgage and is figured directly into the loan payment. Money is put into an escrow account to pay the insuring company for the home insurance. The higher your home insurance then the higher your payment, as it’s a factor.
Property taxes are also charged to homeowners by the city and county the home is located in. This is also part of the mortgage and the bank collects the costs and pays the local taxes through the escrow account the money is held in.
If you need private mortgage insurance
Private mortgage insurance or PMI, is insurance that can be required by the mortgage lender when your down payment is less than 20% of the home’s purchase price. PMI is the insurance that you pay for that protects the bank against the losses it would suffer if you defaulted on your mortgage payment and it went into foreclosure.
Home association fees
HOA fees are a set recurring fee that can be required monthly or quarterly by the homeowners association that maintains a town home or condominium complex. The HOA fees pay for the services it takes care of.
Things HOA fees usually cover:
- Maintenance of the outside property, landscaping, and lawn service.
- Pool cleaning and maintenance.
- Snow removal from the driveways and parking spaces.
- Trash removal from common areas.
- Electricity and utilities for common use areas like clubhouses.
- Security guards and alarms for private and gated communities.
- Outside pest control and for common use areas.
What is the formula for calculating monthly mortgage payments?
The above factors go into calculating your mortgage payment with an emphasis on the total amount you’re borrowing, the interest rate charged for the loan, and the time duration you will set up to pay back your mortgage principle in full. To calculate a good estimate for your monthly mortgage payment you can use this equation: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1].
Each of the variables in the formula explained:
M = Is the total monthly payment.
P = Is the total amount of your loan (principle financed).
I = Your interest rate based on a monthly percentage.
N = Total amount of months in the time duration for paying off your mortgage.
How many times my salary should I borrow for a mortgage?
A common financial rule of thumb for how much house payment you can afford based on your income is to multiply your monthly gross income (before taxes) by 28%. As an example, if you earn $10,000 every month pre-tax, multiply $10,000 by 0.28, a $2,800 mortgage is what you are suppose to be able to afford based on your salary. This means that a $2,800 monthly mortgage payment should be the most you can afford regardless of whether you get a 15-year or 30-year mortgage.
What are the 4 components of a mortgage payment?
A monthly mortgage payment usually has four primary components: the loan principal, loan interest, property taxes, and home insurance.
The loan principal is the amount of capital you borrow when you sign for your home loan. It’s easy to calculate your mortgage principal owed by subtracting your down payment from your house’s selling price.
Loan Interest Rate
The mortgage loan interest rate is the percentage on the principal loan balance you pay the bank in exchange for borrowing the capital from them. The annual percentage rate (or APR) is different than the loan interest rate as it takes other costs into account, including your mortgage interest rate, into it’s calculation. The standard mortgage in the U.S. accrues interest monthly, the amount due the lender is calculated on a monthly basis. The mortgage loan interest rate is the annual rate of carrying the balance on the principle each year until the principle is paid off.
Mortgage lenders usually roll property taxes into the borrowers’ monthly mortgage payments. While private lenders who offer conventional loans are usually not required to do it, the FHA requires all of its borrowers to pay taxes along with their monthly mortgage payments.
Home insurance premium is included in your mortgage payment when you have an escrow account. When you pay your mortgage each month, a part of the total payment is put in your escrow account to pay for your home insurance along with any property taxes and for private mortgage insurance if you have less than 80% equity in your home.
Simple mortgage calculator
Here is a simple mortgage calculator below that does all the figuring for you when you key in your mortgage components.