Purchasing a home is an exciting milestone in your life, but it also comes with a lot of financial planning. One of the most important pre-homebuying steps is calculating what your total monthly mortgage payment will be. This includes principal, interest, taxes, insurance, and any additional housing costs. Having a realistic estimate of your total payment is essential for budgeting purposes and determining how much house you can comfortably afford.
At Finfix Broker Group, our team of experienced mortgage brokers is here to guide you through the entire process of calculating your estimated monthly payment. In this detailed guide, we’ll walk through each factor step-by-step so you have a complete understanding of what goes into your mortgage payment each month.
Determine the Purchase Price and Down Payment Amount
The first key pieces of information you need are the purchase price of the home you want to buy and the down payment amount you have available. The down payment is typically a percentage of the total purchase price that you pay upfront when you close on the home. This down payment amount reduces the actual loan amount you need to borrow from the lender.
Save up as much as you reasonably can for a down payment, as a payment of 20% or more gives you the best rates and avoids expensive private mortgage insurance (PMI). Review your bank account balances, investments, retirement savings, and any gift money to see how much you can put down. Know the purchase price of homes you are interested in and use a mortgage calculator to see loan amounts at different down payments.
Calculate the Monthly Principal and Interest (P&I)
The main portion of your mortgage payment goes towards principal and interest, or P&I. The principal is the actual amount you are borrowing from the lender. The interest is the additional charge for borrowing that money, typically over 15 or 30 years.
Your P&I amount will vary based on the specific loan amount after your down payment, the prevailing interest rates lenders are offering, and the length of your repayment term. Get rate quotes from 3-4 different lenders to find the most competitive interest rate and best P&I options. Compare 15-year and 30-year term scenarios as well.
Factor in Monthly Property Tax Amounts
In addition to P&I, part of your monthly mortgage payment will go into a property tax escrow account. Contact your local assessor’s office to find out the annual property tax rate and amount you will have to pay for properties you are interested in.
Take the estimated annual property tax total and divide it by 12 to see how much of your monthly payment should be allotted for taxes. Remember property taxes often increase steadily over time, so build in a buffer when budgeting.
Include Monthly Homeowner’s Insurance
Mortgage lenders require all borrowers to maintain homeowner’s insurance to protect the property from disaster, theft, or loss. Shop around with several insurance agents to get quotes on premiums for the amount of coverage you will need.
Take the full annual homeowner’s insurance premium and simply divide it by 12 months to determine how much gets added to your ongoing monthly mortgage payment for insurance.
Account for Private Mortgage Insurance (PMI)
If your down payment amount is less than 20% of the home purchase price, you will be required to pay for private mortgage insurance, known as PMI. This provides coverage for the lender if you default on the loan.
Your PMI amount will vary depending on specific loan details like loan-to-value ratio. Generally PMI costs range from 0.5% – 1% of the total loan amount per month. Your lender can provide your exact PMI estimate based on your down payment and loan amount.
Check for Any Additional Monthly Fees
Depending on the home, you may have some extra monthly expenses to factor in beyond the expenses we’ve covered. For example, condos or HOAs often have monthly homeowners association dues. If the home is in a high-risk flood zone, you may have to budget for flood insurance as well.
Carefully research the home to check for any additional fees like HOA dues, flood insurance, trash pickup costs, etc. and add these amounts to your monthly payment estimate.
Use an Online Mortgage Calculator
The easiest way to get an accurate big picture estimate of your total monthly mortgage payment is to use an online mortgage calculator. You enter in the home price, down payment, estimated interest rate, property taxes, insurance, PMI, etc. and the calculator does all the math for you.
Play around with different down payment amounts, interest rates, home prices, and loan terms. See payment scenarios over 15-years and 30-years. This gives you a realistic estimate of potential monthly costs.
Compare Payment to Your Budget
Once you have your estimated total monthly mortgage payment amount, compare it to your current household budget. Look at your monthly take-home income, existing long-term debts like car loans, student loan payments, credit card debts, and other financial obligations.
See how much room you have available in your budget for a new mortgage payment. If needed, you can adjust the down payment, look for a lower priced home, or opt for a longer loan term to decrease the monthly costs to fit your budget.
Calculating your mortgage is a key part of financial planning for a home purchase. Our team of experts at Finfix Broker Group will help educate you through every step of the process. We want to ensure you fully understand what goes into your total monthly payment and how much home your budget can accommodate.
Contact us today to start a pre-approval and make sure your dream home is affordable.