You may be thinking about purchasing a house or refinancing the one you’re already in. This decision brings with it a number of questions: What kind of interest rate can I get? What kind of payment should I expect? How much money can I save by paying off the loan before the end of the term?
In this article, we’ll show you how to calculate your mortgage payment by breaking down the formula for you. We’ll also show you how the variables that go into the equation work, reviewing some ways in which you might save some money and feel better prepared for the future. Lastly, we’ll walk you through a few different calculators and their uses.
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.
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.
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.
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.
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:
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.
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.
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.
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.
There are two ways to go about calculating a monthly mortgage payment. You can go old-school and figure it out using an equation, or you can use a mortgage payment calculator.
As mentioned above, the easiest way to come to your mortgage payment is to use a mortgage calculator. However, having a basic understanding of the formula can give you an idea of how changing variables impacts the other parts of the equation. Let’s take a quick look.
M = P [ I(1 + I) N ] / [ (1 + I) N − 1]
This formula will help you calculate your mortgage payment based on the loan principal and interest before taxes, homeowners insurance and HOA fees. If it looks a little intimidating, though, you’re probably not alone – let’s break it down variable by variable so it’s easier to understand:
Having your own formula set up also gives you the opportunity to compare different payment scenarios, including interest-only payments versus fully amortizing loans.
As mentioned before, this covers principal and interest, but you can add in taxes and insurance once you know them to get to your total monthly payment. A lender will qualify you using these four payment factors, sometimes shortened to the acronym “PITI”. Where applicable, HOA fees are added in, and the acronym becomes “PITIA,” with the “A” standing for “association dues.”
There are some special situations where a spreadsheet formula might be useful. For instance, mortgage calculators tend to assume a fixed-rate mortgage. If you have an adjustable-rate mortgage (ARM) where the rate changes over time, you can set up an amortization table using the PMT function in Microsoft Excel and change the formula so that the rate and time remaining reflect the new terms once the interest rate adjusts.
Generally, you’re better off using a mortgage calculator to calculate your mortgage payment because it’s difficult to input the formula properly in a regular calculator.
Using a mortgage calculator takes the guesswork out of the formula and can help you calculate your mortgage payments much faster. There are several types of mortgage calculators, so it’s important to understand the purpose of each one so that you can be sure you’re using the right one for your needs.
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.
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:
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:
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:
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.
Whether you use the formula or a mortgage calculator, calculating your potential mortgage payment should help you feel more informed on how to get a mortgage and your budget for buying a home, or to decide whether to move forward with a refinance. It all depends on your lifestyle and personal goals.
Here are some of the questions a mortgage calculator can answer:
An important part of the home buying process for buyers is knowing how much house they can afford. One way to help ensure you won’t be in over your head is to calculate your potential mortgage payment using figures like the sale price of the home, the amount of your down payment and your interest rate.
If you’re ready to take this next step, and begin the home buying process, you can start your mortgage application online with Rocket Mortgage ® today.