What's in this article?
The biggest question homebuyers want to have answered: “How much of a home loan can I afford?”
And the best way to get the right answer is to calculate the potential average monthly mortgage payment and see how well it fits into your budget.
Especially if you are a first-time homebuyer, calculate the average monthly cost carefully and accurately.
It’s an enormous responsibility—but Americans and people worldwide become homeowners all the time and do it successfully. And you can, too, if you rise to the challenge of the housing market and plan carefully.
To help you out, let’s break down the essential parts of the average monthly mortgage payment to show you what goes into the equation. Next, we can show you how to calculate the final number, either by yourself or with Homefinity’s free online mortgage calculator.
What costs are included in a mortgage payment?
Once approved for a mortgage, you’ll pay one monthly sum after you purchase your home. A monthly payment calculator can help you get an estimate of what you’d pay in different situations. This comes in handy when you’re shopping for lenders and you’re deciding the loan terms and rates.
Let’s look at each component of mortgage payments and what that means for your budget.
Mortgage principal (Loan amount)
The “mortgage principal” is the term the real estate industry uses for the initial loan amount.
Some people might get this number confused with the house’s purchase price.
For example, if you want to purchase a 300k home, you’ll likely need a downpayment. Let’s say you have 20% to offer. That equals $60,000 (20% of 300,000).
In this example, you’ll need a loan of $240,000 (original home price minus the down payment). This amount is the mortgage principal.
You don’t have to have the exact purchase price of your home when you use a mortgage calculator. Since this tool is only offering an estimate of what your monthly payment will be, you can ballpark the purchase price if you’re still searching for a home or just started your search.
During the initial part of the mortgage repayment, most of your monthly payments will go towards paying the interest, not the principal mortgage loan amount.
That leads us to the second-most important part of the calculation, the mortgage interest rate.
The interest rate you pay is essentially a fee that the mortgage lender charges you to borrow their money.
Generally, a person’s credit score is the most significant variable in how that percentage will be calculated.
For example, suppose the borrower has a high credit score, a sizable downpayment, and a low DTI (debt-to-income ratio). In that case, they’ll likely be offered a lower than average interest rate.
Because a borrower with these factors is considered a lower risk to mortgage lenders, they can secure lower interest rates. On the other hand, higher-risk borrowers will be charged a higher interest rate to protect the lender in the case of foreclosure.
If you choose to calculate your monthly interest rate by hand, you take the annual interest rate and divide it by 12. So, if your interest rate is 4%, then your monthly interest rate is 0.33%.
The number of payments
The two most common loan terms for fixed-rate mortgages are 15 and 30 years.
To figure out the number of monthly payments, you’ll have to multiply the term of your mortgage by 12. Note that adjustable-rate mortgages are more difficult to calculate for the long term because the interest rate will change at some point.
So, a 15-year mortgage term will total 180 months of mortgage payments. A 30-year mortgage term will work out to 450 monthly mortgage payments.
If needed, add private mortgage insurance
Private mortgage insurance, or PMI as it’s commonly called, is always required if you offer less than a 20% downpayment on a conventional mortgage.
If you do have to include PMI, then you’ll be charged a PMI premium on each monthly payment by the lender until you have paid at least 20% of the purchase price.
Once a homeowner reaches the 20% threshold, the PMI premiums are frequently removed automatically. The exact cost of your PMI will vary, but they typically cost between 0.2% and 2% of the principal (loan amount).
Pro Tip: If you have something other than a conventional mortgage loan, like an FHA loan, you will have to pay a different kind of mortgage insurance.
Your monthly mortgage payment will likely include property taxes collected by the lender and then moved to a specific account, usually called an escrow or impound account.
At the end of each year, these collected property taxes will be paid to the government on behalf of the homeowner.
How much property taxes will you pay? This figure will depend on the tax rates of your area and the value of your home. Most local government websites allow you to calculate your property tax yourself.
One of the costs of homeownership will be a requirement to pay for homeowner’s insurance. Luckily, this is a cost that is frequently included in the monthly mortgage payments put together by your mortgage lender.
Many types of homeowners insurance exist, so ensure you shop around to find the best policy for your goals and situation.
Pro Tip: Policies with high deductibles will frequently have lower monthly premiums.
Homeowners association fees (HOA fees)
Depending on the property you buy, HOA fees may be added that cover specific expenses for your home or the area it’s located. The board running the HOA will decide how much to charge homeowners.
Some mortgage lenders roll these fees into the escrow account and other mortgage costs. Other costs have to be paid separately, so be sure to check with your HOA board and lender.
Remember that after the mortgage has been paid off, you’ll likely still have to pay your HOA fees.
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What’s the easiest way to calculate your monthly payment?
You have two choices for calculating your average monthly mortgage payment. Once you have all the inputs listed above, you can calculate them by hand or using one of the handy mortgage calculators available online.
Calculating average monthly mortgage payments by hand
Here is the equation you need to use to calculate your average monthly payments (M):
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
P = the principal loan amount
i = your monthly interest rate
n = number of months to repay the loan
Luckily if math is not your forte, there are many online calculators and tools available to help you estimate your payment.
As part of Homefinity’s commitment to finding you the best mortgage product, we’ve created our own specially designed mortgage calculator.
Use this calculator during your home buying process and then contact one of the experienced mortgage professionals at Homefinity to start preapproval.
A home purchase might be one of the best adventures you can embark upon.
Homefinity’s loan officers can help you sort through all the information and the math to help you arrive at your best, and most affordable, destination.
Reach out to our team of loan officers and let’s see what we can do to find your dream home.
Photo by Nataliya Vaitkevich