How To Calculate Your Monthly Mortgage Payment

If you’re like most people, a home is one of the largest purchases you’ll ever make. A house comes with many different expenses, including your mortgage payment. It’s a good idea to determine what your monthly mortgage payment will be before buying a house.

Knowing your estimated mortgage payments can help you determine whether you can afford the house and help you be better prepared for homeownership. This article explains how to calculate your monthly mortgage payment and steps to take to lower your payments.

Why Calculate Your Monthly Mortgage Before You Buy A Home?

Your monthly mortgage payment will likely account for your biggest cost of living expense. For that reason, calculating your monthly mortgage payment is an important first step in the home buying process. Here are a few ways it can help you:

• Know what you can afford: If you’re a first-time home buyer, it’s hard to know the kind of house you can afford based on the price alone. Estimating your monthly mortgage payments can help you determine a good price range so you can make an informed home buying decision. 
• Find the right loan: Calculating your monthly mortgage payments can also help you determine whether a certain loan type is right for you. For example, when you do the math, you may realize that you’d rather opt for 15-year loan terms so you can save money over the life of the loan. It could also help you determine whether an adjustable-rate mortgage (ARM) is a good option for your situation. 
• Come up with a budget: When you know what your mortgage payments will be, it’s easier to come up with a monthly budget. That way, you’ll know what percentage of your income is going toward housing costs.
• Avoid financial problems: When you calculate your monthly mortgage payment, you may realize it’s too expensive and that you need to choose something less pricey. This can help you avoid overextending yourself financially. 
• Comparison shopping: Knowing your estimated mortgage costs makes it easier to compare offers from different lenders. It allows you to see how much you can save by choosing one lender over another. 
• Make better decisions: Finally, knowing your estimated mortgage costs can help you make better financial decisions. You can use this information to determine whether you should buy a cheaper home or spend time improving your credit score.  

What’s Included In Your Monthly Mortgage Payment?

If you’ve never owned a home before, you may be surprised to learn that several different factors determine your monthly mortgage payment. Understanding how each of these factors work will help you estimate your monthly mortgage payments. 

Principal And Interest

The principal is the money you borrowed to purchase your home. For example, if you bought a $400,000 home and made a 20% down payment, your principal is $320,000. So, because of a down payment, the principal amount may be lower than the purchase price of the home. 

The interest is the fee your lender charges you for the privilege of borrowing the funds, and it’s expressed as a percentage. The lower your interest rate, the less money you’ll pay over the life of the loan. We’ll discuss how principal and interest are calculated in more depth later.

Property Taxes

Property taxes are levied by cities, counties and school districts against properties within their boundaries. Each of these taxes are calculated separately and then added together to determine the mill rate for the entire region. 

Your property taxes are calculated by multiplying the mill rate by the assessed value of your property. Property taxes can vary greatly depending on the state you live in – New Jersey, Illinois and New Hampshire have the highest average property taxes. 

Property taxes are also included into your monthly mortgage payments. These payments are put into an escrow account and your lender uses the funds to pay your taxes when they’re due.

Homeowners Insurance

When you take out a mortgage, your lender requires that you purchase homeowners insurance. Homeowners insurance pays to repair or rebuild your home if it’s damaged in a fire or natural disaster, and it protects your lender’s investment. 

These payments are usually made to an escrow account and your lender pays the insurance company directly. If your lender allows it, you can pay your premiums directly to the insurance company.

Homeowner Association Fees

Homeowner association (HOA) fees can range from a few hundred dollars to more than a thousand dollars annually. HOA fees are dues that homeowners living within a certain community must pay. These costs help maintain shared amenities, like a pool, maintenance of common areas and municipal services, like trash removal. 

HOA dues may be included in your monthly mortgage payment. These payments can be made through your escrow account or paid directly to the HOA or property management company. Whether they’re included in your mortgage payment or are an annual fee you pay your HOA, you’ll need to plan for these costs before buying your home. 

How To Calculate Your Mortgage Principal And Interest

In the beginning, the majority of your mortgage payment goes toward paying interest, and a small amount is applied toward the principal. As you pay off more of the principal over time, you’ll gradually owe less interest since your overall loan amount is lower. 

There are several different ways you can calculate your principal and interest payments. You can figure this out yourself using a simple formula, or you can opt for a spreadsheet or mortgage calculator. 

Mortgage Payment Formula

This formula will help you calculate your monthly mortgage payments based on principal and interest alone:

M = P [ I(1 + I)^N] / (1 + I)^N − 1]

M = Mortgage Payment

In this formula, the mortgage payment applies to a fixed-rate mortgage and includes only principal and interest.

P = Principal Amount

The principal amount is the total amount borrowed that you have to repay. If you made a down payment, your principal will be lower than the home sale price.

I = Interest Rate

The interest rate provided by mortgage lenders is the annual interest rate. For this calculation, the interest rate must be converted into a monthly rate by dividing the interest rate by 12. Make sure you use the base interest rate, not the APR. 

N = Number Of Payments

The number of payments is measured in months, so a 30-year mortgage will have 360 payments. The longer your loan terms, the lower your monthly payments will be. 

Example

Here’s how you’ll calculate the principal and interest for a $300,000 mortgage with a 7% interest rate and 360 payments:

M = 300,000 [ 7(1 + 7))³⁶⁰] / (1 + 7)³⁶⁰ − 1]

Once you know your principal and interest, you can add in taxes and insurance to determine your total monthly payment. 

Spreadsheet Formula

In some cases, using an Excel or Google Docs spreadsheet can make it easier to calculate your monthly mortgage payment. A spreadsheet allows for more customization than using a mortgage calculator alone. For example, you can adjust the formula to include an amortization schedule if you have an adjustable-rate mortgage (ARM).

Mortgage Calculators

For most home buyers, the easiest way to calculate your mortgage payments is by using the Rocket Homes℠ mortgage calculator. This mortgage payment calculator takes the guesswork out of figuring out your monthly mortgage payments.

What Can Cause Your Monthly Mortgage Payment To Change?

If you have a fixed-rate mortgage, your interest rate will stay the same for the life of the loan. Even still, your monthly mortgage payment may change slightly over the years – here are some of the main reasons why. 

Mortgage Interest Rate Adjustments

If you have an adjustable-rate mortgage (ARM), you’ll receive a low initial rate in the first several years. But once the initial period ends, your interest rate will adjust annually based on current market conditions. 

This can work in your favor if interest rates drop. But if interest rates go up, your interest rate will increase as well and your mortgage payments will be higher. If you’re considering applying for an ARM, ask your lender to agree to a rate ceiling that your interest rate won’t surpass.

Property Tax Adjustments

Each month, your lender sets aside a certain amount of money in escrow to pay your property taxes. If property taxes increase, your lender will have to adjust your escrow payments accordingly. This can also lead to higher mortgage payments. 

Homeowners Insurance Policy Changes

When inflation goes up, insurance companies will often respond by raising premiums. Since the overall cost of goods is higher, it will cost them more money to pay for repairs to your home or replace your belongings. If your homeowners insurance goes up, your lender will need to take out more for escrow payments. 

HOA Fee Changes

Your homeowners association may periodically increase the annual dues. If this fee is paid through escrow, your monthly mortgage payment will increase as well.

Escrow Account Adjustments

Escrow accounts must maintain a minimum balance and may require adjustments in monthly payments to account for any shortfalls or surplus funds. For example, if you reach 20% equity in your home and eliminate PMI, your monthly payments will go down. 

How Can You Lower Your Monthly Mortgage Payment?

Your mortgage payment will likely account for a significant portion of your monthly budget. But if your home costs start to cause financial difficulties, there are steps you can take to lower your mortgage payment. 

Negotiate A Better Interest Rate

If you’re still in the home buying process, the easier way to lower your mortgage payment is by negotiating a better interest rate. Mortgage rates aren’t set in stone, and your lender may be willing to work with you. 

Start by shopping around and comparing quotes from multiple lenders. According to Freddie Mac, shopping around can help you save between $600 and $1,200 annually.

The interest rate you receive is largely based on your credit score since borrowers with excellent credit are seen as less of a lending risk. You can improve your credit score by paying your bills on time and lowering your credit utilization rate. 

And if you plan to stay in the home for a long time, you might consider purchasing mortgage points. Mortgage points are a one-time fee you pay to receive a lower interest rate. They typically cost 1% of loan balance and will lower your interest rate .25%.

Refinance Your Mortgage

If you’re already a homeowner, you may be able to lower your monthly interest rate by refinancing. For example, refinancing can help you take advantage of lower rates if interest rates drop. Or if you’re currently on a 15-year mortgage loan, you can extend your loan terms to 30-years and lower your payments. 

However, you will have to pay closing costs when you refinance, which can add up to thousands of dollars. Take some time to calculate your breakeven point to determine whether refinancing makes financial sense. 

Ask For A Property Tax Exemption

Another way to lower your monthly mortgage payment is by requesting a property tax exemption or adjustment. The government has programs available to help lower or eliminate your property taxes, though the requirements will vary by state. 

Find A New Homeowners Insurance Provider

If you pay your homeowners insurance monthly or are close to renewing your annual premiums, you may want to shop around for a new provider. Shopping for competitive offers on homeowners insurance can give you leverage with your current insurer. 

The Bottom Line

If you’re in the process of buying a home, it’s a good idea to calculate your monthly mortgage payment. This information will help you understand how much you can expect to pay and come up with a more accurate monthly budget. 

And once you know how your mortgage payment is calculated, you can repeat this process every time you buy a home. If you haven’t started the home buying process yet, you can begin the application process for a mortgage today.