Understanding your home loan will help you to make better financial decisions. Rather than just taking whatever the payment is the bank tells you, it is helpful to study the numbers behind the mortgage. This article will explain all of the parts that make up your mortgage payment, from principal to interest to property taxes.
To calculate what your mortgage payment will be, you need to have some details about the loan. Then, you can add it all up by hand or use an online mortgage calculator or spreadsheet to run the numbers.
Most of us only look at the bottom line payment, but there are other aspects you should consider as well. We will start below with determining the payment, and we also will examine how much you pay annually in interest and how much you are paying off – how much of the home you really own at any one time.
Mortgage Payment Inputs
To calculate the mortgage payment, you need to have the following information about a potential home loan:
- The total loan amount
- The interest rate on the home loan (not the APR, which includes closing fees and other costs of the loan)
- How long you must repay the loan – 15 or 30 years is most common
- Whether the loan is fixed, adjustable or interest only
- What the home is worth today
- Your gross monthly income
Once you have this information, the easiest way to calculate your payment is to use an online mortgage calculator.
An interesting fact of mortgage loans that many people do not know is generally, for every $100,000 you borrow, you can expect a total monthly mortgage payment of $725, including principle, taxes, insurance and homeowners insurance.
How Much Of Payment Goes For Interest?
The amount of your monthly payment is important, but you also need to know how much you are losing in interest each month. Part of each payment is the interest on the loan. The rest goes to paying down the loan, but you also have taxes, home owners and often mortgage insurance costs as well.
When you are looking at a specific home loan, you should be able to get an amortization table for the proposed loan from the lender. It will show you how much of each payment goes towards principal and interest. If you are not satisfied with how much of the payment is going towards interest, you have a few options:
- Borrow less with a smaller or plainer home
- Pay extra each month
- Try to get a lower rate
- Choose a 15 year loan instead of a 30 year loan
Determine How Much You Own – Equity
It also is important to understand how much of the home you really own at any given time. You do own the home but until it is paid off, the mortgage lender has a lien on the property, so you cannot keep the home if you do not make payments. The amount of the home that is really yours – the equity – is the current value of the home minus any mortgage balance.
There are several good reasons to know what your equity is:
- Knowing your loan to value or LTV is important because the lender wants to see a minimum ratio before the loan is approved. With the exception of VA and USDA loans, the highest LTV you can have these days is 97%. That is, you have to put down at least 3% to be approved for a conventional loan; the minimum down payment for an FHA loan is 3.5%.
- Knowing how much of the home you own is important to determine your net worth. Owning a $500,000 home does not mean much if you owe $495,000 on it
- If you have a certain amount of equity, you can borrow against the home with a second mortgage – either a home equity loan or a home equity line of credit. Most lenders want to see an LTV under 80% to approve a second mortgage.
Is the Loan Affordable?
Mortgage lenders often will approve you for the maximum loan possible with your income, depending upon your debt to income ratio. But you do not have to take out the maximum loan you are approved for. It may be wise to take out less.
We advise taking a close look at your monthly budget and decide how much you can afford to pay for your entire mortgage payment. After you decide, talk to lenders and debt to income ratios. A common mistake is to look for homes first and to end up with more home than you really can afford, even if you can be approved for the mortgage. It is advantageous to buy less home and have more money left over for maintenance, upgrades and the inevitable financial surprises of life.
References: Calculate Mortgage Payment