Several types of mortgages attract different monthly payment rates and it would be a bad move to jump right into the home-buying process without an adequate understanding of how mortgage payments work.
While you’re excited about owning a home, there are important questions to ask. Like “how much can you afford on your monthly mortgage payments?”
We’ve itemized all you need to know about monthly mortgage payments in 5 compact sections:
Mortgages are major financial commitments you would make in your life. Understanding the process helps you make better decisions. If you’re a first-time home buyer, this guide has all you need to know.
A rule of thumb in assessing how much monthly payment you can afford is to follow the 28/36% rule which advises that 28% of your monthly gross income should go to your monthly mortgage payment and 36% to all your home debt.
Different factors that can influence your monthly mortgage payment include:
Principal: You have to pay back the borrowed amount for the home loan. With each mortgage payment you make, the principal amount reduces.
Property Taxes: A government-imposed tax on land or property. You’re expected to pay one-twelfth of the annual tax bill on your home with each monthly payment.
The tax is paid to the loan servicer who saves it in an escrow account to be paid when due.
Interest: The money the lender charges monthly for use of the loan. To know the amount of interest you are to pay with each monthly mortgage payment, simply divide the annual interest rate by 12 (months in a year), then multiply by the payable mortgage principal.
Homeowners Insurance: A form of property insurance that delivers financial protection from damage and economic losses to your home or household assets.
Monthly homeowner insurance payment is similar to the payment format of property taxes.
Mortgage Insurance: The standard amount for a down payment is 20% upfront of the home purchase price.
Anything less and you’ll be advised to get private mortgage insurance (PMI). This way, the lender’s interest is protected in case of a default.
There are two ways to calculate your monthly mortgage payment. This first is manual calculation.
This helps you learn how the different components of a monthly mortgage payment discussed in section 1 work concurrently to affect your monthly mortgage rate.
The formula is:
T = L [ r(1 + r)^n ] / [ (1 + r)^n – 1].
Each of the variables represents:
T = Total monthly mortgage payment
L = The total loan amount
R = Interest rate, as a monthly percentage
N = Mortgage term (total amount of months for paying off your mortgage)
Note that this formula only uses your loan amount, interest rate, and mortgage term. Other variables can be included like your down payment, property tax, or homeowner’s insurance which are all components that determine your monthly mortgage payment.
If you don’t want to go through the manual process, you can easily calculate your monthly mortgage using a mortgage loan calculator. All you need to do is input the required variables and your estimate is calculated for you.
Yes, it can if your insurance or tax fees increase, you incur a late payment charge from your loan servicer, your mortgage type is an adjustable rate and the rate goes up.
Fortunately, you can also lower your monthly mortgage payment by doing any of these: take out smaller mortgage loans, apply for a longer loan term, or meet the 20% upfront on the down payment.