Understanding how much you can safely afford to spend on mortgage payments before you apply for a home loan can help you make the best financial decisions for your situation.
And while you can calculate your mortgage payment by hand, using a mortgage calculator can make the process much easier. Let’s break down everything that goes into a mortgage payment, what determines your interest rate, plus how to use our mortgage calculator.
What does my monthly mortgage payment include?
Your mortgage payment is actually a consolidation of several expenses. While no two mortgages are identical, most mortgage payments include the following.
The mortgage principal is the amount you borrow from a lender to finance your home purchase. To calculate your loan principal, subtract your down payment from the home’s purchase price.
For example, if your home costs $400,000 and you have $100,000 saved up for your down payment, you’ll need to borrow $300,000 to complete the purchase. In this example, your mortgage principal is $300,000.
Mortgage interest rate
Interest is essentially the lender’s fee; it’s the cost of borrowing money to buy a home, and it’s written as a percentage such as 4.75%.
Several factors can affect your interest rate.
Credit score and credit history
Borrowers with good credit will usually get the best mortgage interest rates available. A general rule is that the higher your credit score, the lower your interest rate.
Debt-to-income ratio (DTI)
For DTI, however, the lower your debt-to-income ratio, the better your interest rate. Most lenders consider 43% the maximum debt-to-income ratio for a mortgage.
This is because lenders view a borrower’s stable financial situation as less of a credit risk.
Market activity can also affect your interest rate. For example, the U.S. Treasury Department sells notes, among other products, to fund U.S. debt (the 10-year Treasury yield is their most popular product).
Treasury yields affect fixed mortgage rates, i.e., rising treasury yields translate into higher mortgage interest rates.
What are current mortgage rates?
Reach out to a mortgage lender, like Austin Capital Mortgage, to get today’s mortgage rates for home loans in Texas, Colorado, and Florida.
Your mortgage term simply means the length of your mortgage contract.
Private mortgage insurance (PMI)
Borrowers with a conventional mortgage must pay private mortgage insurance (PMI) with a down payment that’s less than 20%. PMI costs usually range between 0.2% and 2% of your mortgage principal amount.
Homeowners can often eliminate PMI when they reach 20% equity in their homes.
Not all home loans require PMI. For example, FHA loan requirements include mortgage insurance, but not specifically PMI. And for many borrowers, FHA’s mortgage insurance can cost less than PMI.
The local tax rate where your home is located and your home’s assessed value contribute to your property taxes. Municipal websites often list property tax rates, and some real estate listings include that information also.
Homeowners insurance is usually a condition of mortgage approval. A general rule of thumb about insurance is that insurance plans with higher deductibles typically have lower monthly premiums.
How to calculate a mortgage payment
The simplest method of calculating how much your monthly mortgage payments could be is to use an easy mortgage calculator with PMI and taxes like this one.
Just input some basic information and let the calculator do the rest. Trying different combinations, like larger down payments or longer mortgage terms, can help you see how your monthly mortgage payment could change.
Mortgage payment formula
A mortgage calculator isn’t the only way to figure out your estimated mortgage payment. If you enjoy math, you can calculate it by hand.
The mortgage payment formula used to determine a borrower’s payment is:
M = P[(1+i)n]/[(1+i)n-1]
In this equation:
M represents your monthly mortgage principal + interest
P represents the total amount of your home loan
i represents your monthly mortgage interest rate
Most lenders provide the annual mortgage interest rate, so simply divide the annual rate by 12. For example, if you ask for a 30-year fixed mortgage rate and are quoted 6.03%—divide 0.0603/12 to get a monthly interest rate of 0.0050 or 0.5%.
n represents the number of payments.
To calculate the number of mortgage payments you’ll have to make, multiply years by months.
For example, to determine n for a 30-year mortgage, multiply 12 (months) x 30 (years) for a total of 360 payments.
A 15-year mortgage would be 12 (months) by 15 (years) for 180 months.
Finally, add in any extra fees, such as homeowner association (HOA) fees.
How much should I spend on a house?
Every borrower’s financial situation is unique. What might work for you might not work for your neighbor.
And determining how much you can afford to spend on a home will be specific to your personal financial situation.
Many financial experts suggest that spending no more than 25-30% of your gross monthly income on a home is ideal.
However most Americans with young children are spending closer to 36% of their income on housing. Which means that budgeting and estimating payments is essential as you’re looking to buy a home.
How can a mortgage payment calculator help me?
A mortgage calculator can help you build a home buying budget and calculate monthly mortgage payments.
A calculator is great for testing various payment scenarios depending on your mortgage term, down payment, or interest amount.
By calculating how much you can expect to pay monthly for your mortgage, you’ll be better positioned to find a home you can safely afford.
Can monthly mortgage payments change?
A fixed-rate mortgage offers borrowers one mortgage rate for their entire mortgage term. Therefore, the rate you get when your mortgage is initially approved will be the same mortgage rate you have for your final mortgage payment.
Your interest rate can change, however, if you have an adjustable-rate mortgage (ARM). ARMs offer borrowers an initial fixed-rate period, after which the interest rate can adjust based on market conditions.
First-time home buyers or experienced homeowners—Austin Capital Mortgage is here to help
Whether you’re exploring ways to finance your purchase as a first-time home buyer or are interested in refinancing your mortgage—including exploring home equity loans or HELOC rates—get in touch today.
At Austin Capital Mortgage, we’ll help you get the information you need to make the best decision and make your dream home a reality.
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