When considering purchasing a home, it is important to understand how to calculate your monthly mortgage payment to plan your budget for future expenses. We are going to cover the basics you’ll need to calculate an estimated monthly payment. With this information, you can get an idea of what purchase price you are comfortable with, and what the monthly payment may cost you.
Determining The Loan Amount
Your loan amount is based on the total amount of money you plan to borrow from the lender. This amount excludes what you are planning to put towards the purchase as a down payment. Some loan programs allow you to finance the closing costs in, so that would be something you’d want your lender to estimate for you. The seller can also pay part or all of the closing cost if that is negotiated in the contract. Otherwise, those expenses with be out of pocket, and they won’t factor into the mortgage payment.
Calculating The Interest Rate
When determining the interest rate, is based on multiple different factors including your credit score, loan amount, sales price, DTI (debt to income ratio), property type, loan term, and many other factoring components. The interest rate is the price you pay as an additional cost you incur when borrowing money, in addition to the loan amount borrowed. Your interest rate along with closing cost and fees will vary from lender to lender, so be sure to shop around.
Determining The Loan Term
Next, you’ll need to determine the loan term. This is the length of time you’ll have to pay back the loan, but you do have the option to pay the loan off sooner, if you choose to. A typical loan term can range from 15 to 30 years. Loan term requirements also vary depending on the loan program, so check with your lender to determine what home loan programs you may qualify for.
What is Escrowing?
Escrowing is the process where a mortgage lender sets aside a certain amount each month of the borrower’s mortgage payment. This amount is to help cover property taxes, insurance coverage, and sometimes other fees that come along with owning a home. Depending on your down payment and loan type, you may have the option to waive the escrow requirement and save for these things on your own.
Mortgage insurance is required on a Conventional Loan if you are putting less than 20% down, and it also can be required on other loan programs regardless of your down payment. Check with your lender if this will be a requirement for you, and if it is, you might need to factor the amount into your monthly payment. You can sometimes “buyout” the premium as part of your closing costs in one lump sum to avoid paying it as a monthly premium.
Just to recap, these are the things you will need to determine an estimated monthly mortgage payment: the purchase price of the home, the amount of your down payment, the interest rate, the loan term, the mortgage insurance cost, homeowner’s insurance cost, and property tax cost. Once you have all of these figures, you’ll be ready to calculate your estimated monthly home loan payment. To do this, you can use our Mortgage Calculator.