Breaking Down Your Monthly Mortgage Payment
Your monthly mortgage payment breaks down into a variety of financial components, including your loan amount, interest rate, loan term and other factors. Let’s take a look at what you can expect.
Loan Amount
If you’re buying a home, you’ll want to put in the price of the homes you’re looking at and subtract your down payment. If you’re far enough along, you may be able to also add any costs being built into the balance. For a refinancing (sometimes referred to as a "refi"), include the expected balance after you close.
Interest Rate
While it’s largely dependent on market factors outside of your control, your interest rate has a huge impact on what your monthly mortgage payments will be. Remember, the majority of your mortgage payments at first will go toward paying interest.
When calculating your payment amount, you’ll want to look at the base rate and not the annual percentage rate (APR). You use the lower base mortgage rate because your monthly payment doesn’t reflect closing costs. Knowing APR is still useful, but the context of the overall cost of the loan as opposed to monthly expenses is key.
Loan Term
This is how long you have to pay the loan off. Longer terms, like a 30-year mortgage, mean smaller payments, but more interest paid. Shorter terms, like a 15-year mortgage, have the opposite properties – larger payments, less interest paid.
Mortgage Insurance
If you make a down payment of less than 20%, you’ll have to pay private mortgage insurance (PMI) on a conventional loan. This payment is based on a percentage of the loan amount and protects the lender in case you default. The rate is based on the following:
- Down payment or equity amount
- Credit score
- Loan type
- Occupancy
You can request removal on a one-unit primary residence once you reach 20% equity in most cases.
Certain government-backed options like Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and those from the U.S. Department of Agriculture (USDA) have mandatory upfront and annual mortgage insurance or guarantee fee payments that may last for the life of the loan – depending on the loan type and down payment amount or existing equity. Depending on your down payment amount, mortgage insurance premiums may be built into the calculations.
Property Taxes
Since property taxes are often built into your mortgage payment, having a fairly accurate estimate will help you get a better picture of cost. Regardless of whether you have an escrow account, these need to be accounted for as a cost of ownership.
Homeowners Insurance
Mortgage lenders will require you to carry homeowners insurance to protect their investment. If you have an escrow account, the overall premium is split into monthly payments. Even if you don’t, you still need to include this as a homeownership expense.
Homeowners Association (HOA) Fees
These aren’t typically included in your monthly mortgage, even if you have an escrow account. However, it’s important to factor in these monthly and annual fees. The homeowners association (HOA) fees also impact what you can qualify for when you’re looking to purchase or refinance a home.
3 Types Of Mortgage Calculators
There are a few types of mortgage calculators that can prove helpful depending on your situation. Let’s go over the basics on each of them, before digging a little deeper into the information you’ll need to make the most use of each calculator.
1. Purchase Calculator
If you’re looking to buy a new home, our purchase or Home Affordability Calculator can help you run the numbers.
Using this calculator, you can do two things: You'll either be able to figure out how much cash you need for a down payment, or you can work things the other way and figure out how much you can afford based on your down payment as well as your monthly income. There's also a credit estimate, which is important in determining what products you might qualify for.
Here’s what’s typically included in a home purchase calculator:
- Sale price: This is the purchase price of the home. If it’s higher than your region’s loan limit, you might need a jumbo loan, which could also factor in your decision.
- Down payment: This is among the biggest limiting factors of how much you can afford. Depending on the type of loan you’re trying to qualify for, you could need a down payment as low as 3% or as high as 25%. A higher down payment may also help you secure a lower interest rate.
- Estimated credit score: Your estimated credit score gives lenders a look at your qualifications as a borrower. The higher your score, the better your history and typically, the better your rate.
- Income: Along with the down payment, your income is also a huge factor in helping determine how much you can afford. In general, it’s a good idea to spend no more than three times the combined income of all borrowers on the loan on a house.
- Other debt: The less debt you have before taking on a mortgage, the more you can afford in terms of your house. This may have an impact on your interest rate, depending on the type of loan you’re getting.
- ZIP code: The property’s ZIP code can help a lender to know exactly what the expected real estate taxes and homeowners insurance premiums might be in the area. Depending on the sophistication of the calculator, this might also be used to get a more accurate picture of closing costs.
- HOA fees: If you’re looking at a property that’s subject to HOA fees, you should add these into your calculated payment along with anything you know about taxes and insurance.
2. Refinance Calculator
What if you’re not looking to move to a new place, but instead looking to refinance your current home? There’s a calculator for that, too. The first question a refinance calculator will ask you is what your goal is with a refinance. For example, you might wish to lower your existing loan payment, pay off your mortgage faster or take cash out.
It’s also useful to know how much you owe on your existing mortgage, and an estimate of your home value. This helps with determining how much equity you have if you want to take cash out. We also have a Home Equity Calculator that helps you determine how much cash you can convert.
Ultimately, refinance calculators help you determine whether a new mortgage loan makes sense. Let’s run through them:
- Value estimate: Although this usually has to be confirmed by an appraisal or other home valuation method, knowing your home’s estimated value gives you a starting point to help determine how much equity you have in your home in combination with your existing mortgage balance, if any.
- Credit score: As with a purchase, the higher your credit score, the better. This is true both in terms of loan options and the opportunity for lower interest rates.
- Mortgage balance: Together with your home value estimate, your current mortgage balance is used to determine how much equity you have for the purposes of loan qualification as well as to figure how much cash you can take out.
- Other debt: As with a purchase calculator, your other debt is important in a refinance transaction because it helps get to an accurate estimate of your overall debt-to-income ratio (DTI) and what you might qualify for.
- How long you’ll stay in your home: Your time in the home will help you calculate the breakeven point and determine whether it’s worth it for you to do the refinance. For instance, if it takes you 2 years to break even, you know you have to stay in the home longer than that for the refi to make sense.
- ZIP code: Your ZIP code is useful in a refinance calculator for helping determine what your closing costs might be. Title insurance and appraisals still come into play under certain circumstances on a refinance.
3. Amortization Calculator
An amortization schedule shows you how much of your payment goes toward paying off principal and how much goes toward interest for any given payment you make. At the beginning of a loan, more of your payment goes toward paying interest than paying down your principal. The opposite is true at the end of the loan.
This can be helpful since you can pay extra on your monthly mortgage payment and have that amount applied to your loan’s principal balance. By doing so, you can pay down the principal faster to save on the interest payment.
The purpose of any mortgage amortization calculator is to show you just how much interest and how many months of payments you can save by putting some more money onto your principal payment.
The amortization calculator asks you to input the following:
- Your current loan amount
- The length of your loan
- Your interest rate
- The state you live in
You can also see what the effect of a one-time, monthly or yearly additional payment would be on your number of monthly payments or interest.
The results show a sample monthly payment (excluding taxes and insurance) and the interest you would pay. If you’ve chosen to add an additional payment, it shows you how much interest and how many months of payments you could save by putting extra money toward paying down your principal. There’s also a graph that breaks down how much of your payment goes toward principal and how much goes toward interest.
