Determining your overall monthly payment manually is achievable by employing a conventional formula, but opting for an online mortgage calculator often proves more convenient. Regardless of the method chosen, the following requirements should be taken into consideration:
Calculate your mortgage principal
The initial loan amount that you borrow is known as the mortgage principal. For instance, let's consider a scenario where an individual has $100,000 available in cash and decides to make a 20% down payment on a $500,000 home. In this case, they would need to secure a loan of $400,000 from the bank to complete the purchase. Hence, the mortgage principal would amount to $400,000.
In the case of a fixed-rate mortgage, the monthly payment remains consistent. As you make your monthly mortgage payments, a greater portion will be allocated towards reducing the principal amount owed, while the portion dedicated to paying interest decreases.
Calculate the monthly interest rate
The interest rate, represents the percentage fee charged by a bank for borrowing money. Typically, borrowers with higher credit scores, larger down payments, and lower debt-to-income ratios secure lower interest rates. This is because lending money to individuals with a more stable financial situation carries less risk.
Mortgage lenders provide an annual interest rate. If you prefer to perform the monthly mortgage payment calculation manually, you'll need the monthly interest rate, which can be obtained by dividing the annual interest rate by 12 (the number of months in a year). For example, if the annual interest rate is 4%, the monthly interest rate would be 0.33% (0.04/12 = 0.0033).
Determine the number of payments
The most common mortgage terms are 30 years and 15 years for fixed-rate mortgages. To calculate the total number of monthly payments, multiply the number of years by 12 (the number of months in a year). A 30-year mortgage would require 360 monthly payments, whereas a 15-year mortgage would require exactly half that number, which is 180 monthly payments. However, these specific figures are only necessary if you are manually using the formula. When using an online calculator, it will automatically calculate the payments based on the loan type you select from the available options.
Determine the need for private mortgage insurance
Private mortgage insurance (PMI) is mandatory if your down payment is less than 20% of the purchase price when obtaining a conventional mortgage. Typically, the lender adds the PMI premium to your monthly mortgage payments.
The exact cost of PMI will be outlined in your loan estimate, but it generally ranges between 0.2% and 2% of your mortgage principal.
In many cases, PMI can be waived once the homeowner reaches 20% equity in the home. Additionally, if you have another type of mortgage, such as an FHA mortgage, you may be required to pay a different form of mortgage insurance.
Account for the expenses of property taxes
In many cases, a monthly mortgage payment includes property taxes, which are collected by the lender and deposited into a designated account known as an escrow or impound account. At the end of the year, these taxes are paid to the government on behalf of the homeowners.
The amount owed in property taxes depends on local tax rates and the value of the home. Similar to income taxes, the estimated amount determined by the lender, may differ from the actual tax liability. If the funds deposited into the escrow account are insufficient to cover the tax obligation, you will be responsible for paying the difference, which may lead to an increase in your future mortgage payments. You can typically find information about your property tax rate on the official website of your local government.
Account for the expenses of homeowners insurance
Almost every homeowner who obtains a mortgage is typically required to have homeowners insurance, and this cost is often included in the monthly mortgage payments made to the lender.
There are various types of homeowners insurance policies available, so it's advisable to consult with the insurance company to determine the most suitable coverage for your specific situation. Insurance policies with higher deductibles usually have lower monthly premiums.
Determine your monthly payment
If you prefer to perform the calculation manually, you can estimate your monthly mortgage payment (excluding taxes and insurance) using the following formula:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where: M represents the monthly mortgage payment, P denotes the principal loan amount, i signifies the monthly interest rate, and n represents the number of months required to repay the loan.
After calculating M (the monthly mortgage payment), you can then include the monthly property tax and homeowners insurance premium, if applicable. These expenses are fixed costs that are independent of the loan amount, making it easy to incorporate them into your monthly expenses.