Buying a home is probably the single largest purchase you’ll ever make in your life, and unless you are independently wealthy, you’ll need to take out a mortgage to help finance the cost to purchase one.
For many, the biggest question then boils down to, “What are my monthly payments going to be?”
Unfortunately, the answer to this question isn’t cut-and-dry, since there are a variety of different variables that will factor into what your monthly mortgage payment ultimately ends up being. It’s not just as simple as your loan amount divided by the total number of months it will take you to pay it back.
Variables that Affect Your Mortgage Payment: Your Mortgage Type
There are a variety of different mortgage options available to borrowers, including:
- Fixed Rate Mortgage. As the name suggests, the interest rate of a fixed rate conventional mortgage remains consistent throughout the life of the loan. Shorter term lengths typically qualify for lower interest rates than mortgages with longer term lengths. So, for example, a 15-year mortgage will qualify for a lower interest rate than a 30-year mortgage, since there’s less risk to the lender.
- Adjustable Rate Mortgage (ARM). ARM loans usually offer an introductory fixed interest rate for a specific period of time at the beginning of the loan period. After this period of time has passed, the introductory interest rate will then begin to adjust based on the current interest rate index. This index rises and falls based on the economic conditions at the time, and there is always a cap regarding how high — or low — your interest rate can go. Be cautious with an ARM, since at the expiration of your fixed interest rate period, you may end up in a situation where your new interest rate ends up being substantially higher than what you had previously — which can cause your monthly mortgage payment to skyrocket. The flip side is that the interest rate is typically lower in the beginning than even a standard 30-year fixed mortgage
- Balloon Mortgage. The interest on a balloon mortgage is calculated like you are going to make payments over 30 years. The term of the loan, however, may be as little as five years. And at the end of the term, the final payment, or balloon, is due.
Other Factors that Will Affect Your Monthly Mortgage Payment
Other major factors that will ultimately determine your mortgage payment include:
- Loan term. A 30-year mortgage will naturally have a lower monthly payment than a 15-year mortgage, since payments are taken out over a longer period of time.
- The amount of your down payment. The more money you put down upfront as a down payment, the lower your mortgage will be, which in turn, will lower your monthly payment.
- The interest rate you qualify for. Lower interest rates mean you’ll pay less in interest over the course of the life of the loan. As such, lower is always better.
Understanding How Your Monthly Mortgage Payment Is Calculated
Your mortgage payment consists of several different parts, which are outlined below:
- Principal and Interest (P&I). These are the two main components of your mortgage payment. The principal is the amount that you financed and are responsible for paying back. The interest is the money that your lender charges for lending you the money. If you have a 30-year fixed interest rate, your P&I payment will not change during the course of the life of the loan. If you have an ARM, your payments will fluctuate depending on what the calculated interest rate is for the month.
- Escrow Account. Many monthly mortgage payments also include escrow, which is set up to help you pay for associated property-related expenses like your homeowner’s insurance and property taxes. Instead of paying lump sums for each every year, the total costs are broken up over 12 month increments, and you pay a little towards the annual balances due every month. This part of your monthly mortgage payment can change depending on whether your homeowners insurance premium adjusts, as well as whether your properly taxes increase or decrease.
- Private Mortgage Insurance (PMI). If you don’t put at least 20% down and take out a conventional loan, you’ll most likely be required to carry PMI as well. PMI protects the lender in the event you default on your payments. The good news is that once you have at last 20% equity in the home, this requirement will be eliminated and you will no longer be forced to pay the monthly premium for it.
Online Mortgage Calculators
Once you understand everything that goes into your mortgage payment, you can begin to piece it all together. You can use this handy online mortgage calculator to help you calculate estimated mortgage payments based on different loan amounts, term lengths, and interest rates.
Using a mortgage calculator can help you:
- Determine your price range
- See the impact of how much different down payments will affect your monthly payments
- Figure out your budget
- Easily compare different loans types and terms
Calculating your monthly mortgage payment is not difficult once you understand the terminology, as well as variables that go into it. And in the world of finance, knowledge is power.
At Embrace Home Loans, we have over 30 years of lending experience, and look forward to helping you choose a mortgage that fits within your monthly budget, so that you are able to purchase the home of your dreams.