Calculating Mortgage Payments Formula

calculating mortgage payment

You might be considering buying a home or refinancing the one you already have. What kind of interest rate am I eligible for? is only one of the queries raised by this choice. What sort of remuneration am I to anticipate? What financial savings may I expect if I pay off the loan early?

In this article, we’ll deconstruct the method and demonstrate how to figure out your mortgage payment. We’ll also go over some strategies for money-saving and improving your sense of preparedness for the future while demonstrating how the variables that make up the equation function. Finally, we’ll go over a few different calculators and how to utilize them.

Breaking Down Your Monthly Mortgage Payment

Loan Amount

If you’re buying a home, you’ll want to put in the price of the homes you’re looking at and subtract your down payment. If you’re far enough along, you may be able to also add any costs being built into the balance. For a refinancing (sometimes referred to as a “refi”), include the expected balance after you close.

Interest Rate

While it’s largely dependent on market factors outside of your control, your interest rate has a huge impact on what your monthly mortgage payments will be. Remember, the majority of your mortgage payments at first will go toward paying interest. When calculating your payment amount, you’ll want to look at the base rate and not the annual percentage rate (APR). You use the lower base mortgage rate because your monthly payment doesn’t reflect closing costs. Knowing APR is still useful, but the context of the overall cost of the loan as opposed to monthly expenses is key.

Loan Term

This is how long you have to pay the loan off. Longer terms, like a 30-year mortgage, mean smaller payments, but more interest paid. Shorter terms, like a 15-year mortgage, have the opposite properties – larger payments, less interest paid.

Mortgage Insurance

If you make a down payment of less than 20%, you’ll have to pay private mortgage insurance (PMI) on a conventional loan. This payment is based on a percentage of the loan amount and protects the lender in case you default. The rate is based on down payment or equity amount and credit score as well as loan type and occupancy. You can request removal on a one-unit primary residence once you reach 20% equity in most cases.

Certain government-backed options like Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and those from the U.S. Department of Agriculture (USDA) have mandatory upfront and annual mortgage insurance or guarantee fee payments that may last for the life of the loan – depending on the loan type and down payment amount or existing equity. Depending on your down payment amount, mortgage insurance premiums may be built into the calculations.

Property Taxes

Since property taxes are often built into your mortgage payment, having a fairly accurate estimate will help you get a better picture of cost. Regardless of whether you have an escrow account, these need to be accounted for as a cost of ownership.

Homeowners Insurance

Mortgage lenders will require you to carry homeowners insurance to protect their investment. If you have an escrow account, the overall premium is split into monthly payments. Even if you don’t, you still need to include this as a homeownership expense.

Homeowners Association (HOA) Fees

These aren’t typically included in your monthly mortgage, even if you have an escrow account. However, it’s important to factor in these monthly and annual fees. The HOA fees also impact what you can qualify for when you’re looking to purchase or refinance a home.

When Do I Have To Start Making Mortgage Payments?

Whether you’re in the middle of underwriting or you’re just beginning the home buying process, you may find yourself wondering when you’d need to make your first mortgage payment after closing. Your first mortgage payment will be due on the first of the month, one month after your closing. So, if you were to close on a home in January, whether it’s January 1st or the 31st, your first mortgage payment would be due on the 1st of March.

How To Calculate A Mortgage Payment

There are two ways to go about calculating a monthly mortgage payment. You can go old-school and figure it out using a complicated equation, or you can use a mortgage payment calculator.

Use The Formula

As mentioned above, the easiest way to come to your mortgage payment is to use a mortgage calculator. However, having a basic understanding of the formula can give you an idea of how changing variables impacts the other parts of the equation. Let’s take a quick look.

M = P [ I(1 + I)^N ] / [ (1 + I)^N − 1]

This formula will help you calculate your mortgage payment based on the loan principal and interest before taxes, homeowners insurance and HOA fees. If it looks a little intimidating, though, you’re probably not alone – let’s break it down variable by variable so it’s easier to understand:

M = Monthly payment: This is what you’re solving for.

P = Principal amount: This is the loan balance, or what you’re trying to pay off.

I = Interest rate: Remember, you’ll want to use the base interest rate and not the APR. Additionally, because the mortgage interest rate you’re charged is an annual interest rate that does represent the interest that’s supposed to be paid over the whole year, you want to divide this by 12 to get the monthly interest rate.

N = Number of payments: This is the total number of payments in your loan term. For instance, if it’s a 30-year mortgage with monthly payments, there are 360 payments.

There are some special situations where a spreadsheet formula might be useful. For instance, mortgage calculators tend to assume a fixed-rate mortgage. If you have an adjustable-rate mortgage (ARM) where the rate changes over time, you can set up an amortization table using the PMT function in Microsoft Excel and change the formula at a point so that the rate and time remaining reflect the new terms once the interest rate adjusts.

Having your own formula set up also gives you the opportunity to compare different payment scenarios, including interest-only payments versus fully amortizing loans.

As mentioned before, this covers principal and interest, but you can add in taxes and insurance once you know them to get to your total monthly payment. A lender will qualify you using these four payment factors (sometimes shortened to the acronym “PITI”. Where applicable, HOA fees are added in, and the acronym becomes “PITIA,” with the “A” standing for “association dues.”

Use A Mortgage Calculator

As a practical matter, you’re much better off using a mortgage calculator to calculate your mortgage payment because it’s very hard to even input that formula properly in a regular calculator. Using a mortgage calculator takes the guesswork out of the formula for you and can help you calculate your mortgage payments much faster. There are several types of mortgage calculators, so it’s important to understand the purpose of each one so that you can be sure you’re using the right one for your needs.

 

 

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