How to Calculate Your Mortgage

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Having a positive homebuying experience starts with knowing your numbers. Knowing what factors into the monthly payment before you go home shopping will help you narrow down your search and save you money. In this article, we’ll discuss how to calculate your mortgage so that you can compare homes with confidence.

Mortgage Basics

A mortgage is a legal agreement between a financial institution and a borrower for a home purchase. The lender charges an interest rate or the cost to borrow money until the loan is paid in full. For an in-depth primer on mortgages, read this AgentStory article about what a mortgage is. 

Find a Lender

Before you can calculate your mortgage, you’ll need to search for a lender. Browse the Internet for local or online lenders, and ask family and friends for their recommendations. Lenders will have a variety of loan products and term lengths, as well as interest rates, so it’s best to ask for quotes before you fill out a mortgage application. You can also consult with a mortgage broker, who can give you a list of lenders and quotes with a single credit check. You should know your total monthly debts (minimum payments) and expenses. 

Once you’ve found a lender, you’re ready to apply for mortgage preapproval. Your goal is to obtain the lowest possible interest rate, as you’ll save thousands of dollars over the life of the loan. 

Tip: You can comparison shop for mortgages within a 45-day window and have it count as only a single inquiry on your credit report. 

Mortgage Calculation

The easiest way to calculate your mortgage is to plug the numbers into an online calculator. The calculator we refer to accounts for the basic inputs as well as property taxes, homeowners insurance, homeowners association (HOA) fees, and private mortgage insurance (PMI).

The Equation

In case you were wondering, yes, there’s an equation for calculating your mortgage:

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

We won’t quiz or expect you to crunch the numbers with your scientific calculator, but we’ll tell you what the different components are:

  • M – Your monthly payment
  • P – Principal loan balance
  • I – Interest rate (divide by 12 to find the monthly interest rate) 
  • N – Total payments you’ll make over the loan term (e.g. a 30-year mortgage would have 360 payments. 30 x 12 = 360)

You won’t know the exact principal loan balance until your offer is accepted, but you can estimate the amount. Look at house prices in your housing market (or where you plan to relocate) and choose a price that makes sense for your needs. Then, subtract the down payment amount you want to pay—now you have your principal loan balance.

Interest Rate

You’ll want to pay attention to the interest rate because it will impact the cost of holding a loan over the long term. A lender determines your interest rate based on your creditworthiness, loan term, and loan type, though each lender will have a different grading system for consumer home loans. Having a credit score of 740 and higher can help you get the lowest rates, as lenders will have more confidence that you’ll pay the loan back.

Loan Term

Depending on the type of loan you get, you’ll have a 3- to 30-year loan term. You’ll make 12 monthly payments per year, so multiply 12 times the number of years on your loan to calculate total payments. Now you can calculate your monthly payment, excluding property taxes, homeowners insurance, or other fees.

Property Taxes

Every state will have different property taxes, and the amount you’ll pay depends on the assessed value of the home, so it’s best to visit your county’s tax assessor’s website or contact them directly. If you plan to work with a real estate agent in your home search, you can ask for a rough estimate of the tax amount.

Homeowners Insurance

While homeowners insurance isn’t required unless you have a conventional loan, it’s wise to have it if you need it and for peace of mind. Insurance helps with repair or replacement costs if your home is damaged by a storm and protects you from theft. It will also provide liability protection in case someone gets hurt on your property. 

Homeowners Association Fees

When you start your home search, you’ll run into properties that have HOA fees. An HOA is an organization that enforces rules and regulations for properties in a given community. If you’re interested in a property attached to an HOA, you’ll be required to pay annual or monthly dues. The HOA may also charge a one-time initiation fee. Factor in the cost of any HOA fees in your total mortgage payment—even if you pay off your mortgage early, you’ll still have to pay the HOA.

Pro-tip: The cost of an HOA can increase over time or for temporary neighborhood improvement projects. Before you buy a house with an HOA commitment, you’ll want to learn about the rules, expectations, amenities (if any), and the HOA’s history.

Private Mortgage Insurance

No one wants to pay PMI, but sometimes it’s unavoidable if you want to get into a house sooner and lack a 20% down payment. Lenders require PMI until you’ve hit 20% equity in your home. Once PMI goes away, you’ll have a reduced monthly payment. 

Pro-tip: If you’re stuck paying PMI for the short term, consider making extra payments towards your principal to gain equity faster. 

Amortization

If you’re a visual or numbers person, seeing your total mortgage payment decrease over time can reassure you. Amortization provides a monthly breakdown of the interest and principal costs you’ll pay in your mortgage. This calculator will help you determine the true cost of homeownership.

Flood and Earthquake Protections

Some residences are more vulnerable to natural disasters than others. Your homeowners insurance policy won’t cover floods or earthquakes, so if you live in an area prone to those weather-related events, you should consider purchasing a rider or additional policies.

Pro-tip: The costs for flood or earthquake insurance vary widely depending on the state you live in. Comparison shopping will be worth your time! 

The Bottom Line

Phew! You’ve made it through this article, and that means you’ll be able to make a more informed decision when you look for homes. Calculating your mortgage is fairly straightforward, and once you add in additional costs beyond principal and interest, you’ll know the true cost of homeownership. We recommend using an online calculator for the mortgage payment and amortization schedule to make your life easier. Now that you’re preapproved or in the preapproval process for a mortgage, the next step is to find a real estate agent.

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