Buying real estate is an exciting investment with the potential for great financial gain. With any investment, it is important to understand the capital it will require from you. Whether it is your first family home or tenth rental property, knowing the financial demands before locking yourself into a house payment can save you from stress in the years to come. Carefully calculating your monthly mortgage payment before closing a deal will set you up for financial stability and minimize unexpected expenses.
Unfortunately, calculating your mortgage payment is not always straightforward. However, the next three sections highlight things to look for to help you get the most accurate quote for your house payment.
What information do you need to calculate monthly mortgage payments?
The key components to calculating your mortgage include the principal, interest rate, and loan period.
The principal is the amount of money you have taken out for the loan. You can calculate this by subtracting your down payment from the price of the property.
The interest rate will vary depending on the lender, but you should have this number once you get preapproved for the mortgage. If you have not been approved but would like to get an idea about how much your house payment will be, make sure you use a realistic interest rate to get an accurate estimate.
The loan period is also taken into account. 15 and 30 year mortgages are both common, but there are several alternative options which you can find here. Regardless of what you choose, the number of payments you make will impact your mortgage payment overall.
Once you have these three components, you are ready to make an initial calculation. The formula below will tell you your monthly mortgage payment before you add insurance and taxes. You can calculate by hand, or use an online mortgage calculator for an easy estimate.
Principal r(r+1)n
Mortgage Payments = _____________________
(r+1)n -1
Principal = Price of the loan (Total cost of property minus the down payment)
r = Monthly interest rate (Divide the annual interest rate by 12)
n = number of monthly payments (Multiply number of years on your loan by 12)
Online Mortgage Calculators
Online mortgage calculators can be very helpful if math is not your strong suit. They allow you to insert your principal, interest rate, and the number of payments to provide immediate feedback on how much your house payments will be. Online calculators also make it easy to compare costs, as you can see how each variable impacts monthly payments. However, online calculators often do not account for hidden costs that you need to factor into your monthly payments.
Hidden Costs to Consider
Nobody wants to be locked into payments they cannot afford, and luckily this is easy to avoid. In addition to mortgage payments, you should consider property taxes, insurance, and potential Homeowners Association fees.
Property taxes vary depending on where you live, but you can usually find an estimate on the property’s listing. If not, you can look at other local listings or search online for an estimate.
Homeowner’s insurance is a necessary safety net that also adds to your monthly payments. Local insurance companies can give you a quote.
Not all neighborhoods have HOA fees, but it is important to double-check when calculating monthly payments. These fees may change over time and are not included in your mortgage.
Each of these will require initial research, but factoring these costs into your monthly payments at the beginning will save you from surprise fees later on. Simply add the sum of these fees to your original mortgage estimate to see how much your monthly house payment will actually be.
Taking time to calculate your mortgage payment before you buy helps ensure that you can comfortably afford your new property. If you have any questions or would like to talk through loan options, please contact us here and we would be happy to walk through this process with you.
