When you’re thinking about a new mortgage, start with what will impact you the most day-to-day: your monthly payment. This mortgage estimator shows you the best case scenario for a mortgage, beginning with your preferred monthly payment.
Enter your ideal monthly payment, potential down payment, preferred loan term, and interest rate. You’ll see the maximum mortgage you can afford within those parameters.
The key to estimating a mortgage payment on your own is understanding all the elements that contribute to a mortgage. Here’s a list of all the components and why they matter:
The principle of a loan is only the amount of money you initially borrow from a lender. This does not include the amount of interest that will accrue or be charged to you over the life of the loan. Every payment you make is essentially divided into two parts: the principal and the interest. The loan’s principal is gradually paid down over time.
Interest is calculated as a percentage of the mortgage or loan principal. This percentage is set by your lender based on a variety of factors including the influence of The Federal Reserve—the central banking system of the United States who maintains stability by supervising and regulating banks and conducting monetary policy—as well as the personal financial standing of a borrower:
- Influence of the Federal Reserve on Interest Rates: Though the Federal Reserve does not directly decide the interest rate for loans and mortgages, they can influence them by adjusting the federal funds rate or the interest rate that banks in the US charge each other to borrow or lend money which in turn sets a basis for many other interest rates in the country.
- How Personal Financial Standing Affects Rates: Interest rates are set on a borrowing scale but a borrower’s credit score and net worth can improve or worsen their interest rates. For example, someone with a higher credit score could potentially earn a lower interest rate on their mortgage than someone with a lower credit score.
A buyer’s loan term directly affects the number of payments a buyer will make, thus establishing the amount they need to pay each month over the life of the loan. This number can be found by taking the loan term in years and multiplying it by 12. Naturally, the shorter the loan term, the more a borrower will need to pay each month as they will have less time to pay the principal back.
The initial cost of a mortgage and all the elements mentioned above are only the start. It’s important to keep in mind that there are other components that will increase the amount you pay on a property each month. Two of the main ones are listed below:
- Property Taxes and Insurance: Property taxes are determined by the value of a property and its location’s local tax rate. Insurance however is determined based on a variety of factors including location, home size and value, the home’s condition and much more. Homeowner’s insurance can also differ by state so it might be best to look up average property tax and insurance rates for your state to add those into your final calculation for monthly mortgage payments. Both these components are often included in the monthly payment but are not part of the principal and interest calculation.
- Private Mortgage Insurance (PMI): Private Mortgage Insurance only applies to a buyer who is putting less than 20% of the loan’s principal down in the initial agreement. Consider determining whether or not you’ll need to pay a PMI and add that to the potential monthly cost of any property as well.
Understanding the loan principal and the true scope of how much a mortgage will cost you each month is crucial before you dive into signing that loan agreement. Be sure you know how much you truly owe and budget correctly for the monthly costs.
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