How to Calculate Your Mortgage -
No matter the state of the local housing market, buying a home is a process requiring a strategic plan laid out with a qualified Loan Officer before diving in. If you are considering getting a mortgage, it’s important to understand what that means for you financially.
To get a better picture of what your mortgage might look like, you can use a mortgage calculator, which factors the amount you want to borrow with interest rates and loan terms to estimate your mortgage payments. Of course, you’ll also want to understand how payments can change over time and how your debt-to-income ratio can impact your mortgage.
*Treadstone Funding and its employees are not CPAs or financial advisors. Not financial advice. All information provided is for educational purposes only. Contact a licensed Loan Officer before proceeding.
How do you determine your monthly mortgage payment?
Your mortgage principal is the amount you borrowed and are required to pay back. For example, if you took out a $250,000 mortgage for your home, the principal balance only includes that $250,000 sum and does not involve additional expenses for accrued interest, insurance, and taxes.
As with most borrowed money, your loan will include interest on top of the principal amount. Interest is a percentage of the loan balance, and is determined by the broader real estate and economic environment.
When you apply for a mortgage, your lender will require you to obtain homeowners insurance to close the loan. You get to source your own insurance (or we can recommend some awesome agents). Insurance costs vary depending on the provider, deductible, coverage, specific policy details, or bundles with other types of coverage (like auto insurance). Unlike auto insurance, homeowners insurance is factored into the monthly mortgage payment and does not need to be paid separately if you have an escrow account. Some properties, such as condos, may have insurance that you pay with your monthly association dues too. If your property is in a flood zone, you will also have flood insurance.
Your property taxes are based on your home’s assessed value. The location, condition of the property and home, value of comparable homes, and state of the economy all influence property taxes. Like insurance, these costs are rolled into your mortgage payment if you have an escrow account.
Number of Payments
A majority of home loans are 30 year mortgages, which equates to 360 individual payments. The lower the total number of payments, the higher your payment will be. You can always make extra loan payments if you want to work toward paying your mortgage off sooner, especially since additional payments can be allocated specifically to the principal balance.
Home Owners Association Fees
Some properties are located inside of an HOA or condo association, which collect a monthly or yearly fee from its residents. While these fees may not be factored into your single monthly mortgage payment, it’s important to keep them in mind.
What monthly mortgage payment can I afford?
Life is expensive. And it’s important to weigh your existing expenses before bringing in new ones. To determine your eligibility for a mortgage, lenders will look at your debt-to-income ratio (among other things), weighing how much money you make against how much you spend on existing expenses like auto loans and credit card payments. Lenders will look to make sure you have enough excess income to take on a mortgage before approving you for the loan. Understanding debt-to-income ratio is also an important first step for buyers trying to determine what they can afford in terms of a mortgage. Taking out a mortgage is a substantial financial commitment, so it’s important to work with a Loan Officer to find the option that best suits your budget.
Get pre-approved for your mortgage payment!
If you understand your budget and are ready to take the first steps toward securing a mortgage loan, we’ve got you covered. We can get you pre-approved for a mortgage payment that aligns with your goals and fits you financially! The best part? Our pre-approvals are free!
Frequently Asked Questions
Dollar amounts for the principal loan amount, interest, property taxes, and homeowners insurance, along with the interest rate and terms of your loan are used to calculate your estimated monthly home payments. To determine your loan eligibility, lenders will also calculate your debt-to-income ratio, multiplying your monthly income by 45% and subtracting all your existing debt payments. The result of that calculation will help lenders settle on a financially feasible amount to issue for your mortgage.
For accurate calculations, contact a Loan Officer!
Your maximum monthly payment, along with all of your existing debts, typically should not exceed 45% of your income. When lenders calculate your debt-to-income ratio, they multiply your income by 45% and subtract your current debt payments to ensure you bring in enough money to take on a mortgage loan. Factors beyond debt-to-income ratio can also apply, like additional living expenses outside of debts.
You can pay your mortgage payment early, but it is best to do so directly through your mortgage company or loan servicer, so you can ensure the advanced payment is applied to your principal balance. Some lenders will default to applying the payment to your minimum amount due for the next monthly payment, which won’t reduce the amount of interest you have to pay. As such, it is best to connect with your lender directly to understand how the payment is applied.
If your homeowners insurance premium or property taxes change significantly and you have an escrow account, your lender might adjust your monthly mortgage payment to a lower or higher amount depending on which direction your taxes and insurance changed.
*Terms and qualification are subject to underwriting approval and can change without notice. Not all borrowers may qualify. Example figures are for illustrative purposes only.