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How to Calculate Mortgage Payments

Well before you put an offer on a home, you should have secured a lender pre-approval letter which states how much you're qualified to borrow. While this is important in helping you decide the price range that you'll be looking in, it doesn't give you a definite on how much the monthly payments will end up being.

Many factors are involved when you calculate mortgage payments; local property tax rate, the cost of your insurance, the interest rate on your mortgage and so on.  When it comes time to close many buyers are surprised to find their monthly mortgage payment is more than they were expecting.

If you want to make a smart investment in the roof you put over your head it's imperative that you understand exactly how much it's going to cost you each month.

Basics You'll Find on All Mortgage Calculators

Most buyers will use a mortgage calculator online to help them determine what their monthly payment would be. A word of caution: some of these mortgage calculators include basic information only and don't allow for much customization. In these instances, you'll get a ballpark figure that's at best a good estimate.

The basic information used for calculating monthly payments includes:

  • Loan Amount
  • Interest Rate
  • Loan Term

Though this information is key to calculating your monthly mortgage payment, it's just a starting point. Let's look at an example:

Sales Price: $200,000

Amount of down payment: 10%

Loan Amount: $180,000

Annual interest rate: 6.5%

Length of note: 30 years

Principal and interest ONLY: $1137.72   

 Factoring in Private Mortgage Insurance

In the example above, the down payment is less than 20%, which obligates the borrower to pay private mortgage insurance (PMI). PMI is typically about .5% of the loan amount, however this number varies. Using the example from before here's how to calculate monthly PMI costs:

$180,000 x .5% = $900 / 12 months = $75 monthly PMI

PMI is an annual expense, which comes out to be $900 in our example. You then must divide that number by 12 to get the actual monthly PMI payment.

Adjusted Monthly Payment: Principal and interest, plus PMI:  $1,212.72

Be aware that "private mortgage insurance" and "mortgage protection insurance" are two different instruments, even if they sound similar.  PMI is there to protect your lender in case you default on the note; MPI is essentially a life insurance policy that pays off the mortgage in the event of your death.   

PMI regulations and requirements vary from state to state so make sure that you seek out information specific to where you live. Also, keep track of how much principle you're paying off on your loan. Lenders aren't legally obligated to cancel the PMI until your loan-to-value ratio is 78%, but you can request it be canceled once your reach 80%.

Our example loan would carry a PMI charge for approximately 94 months before it can be canceled.

Tip: Extra payments on your loan go directly toward paying down the principle only. Making extra payments when you can will help reduce the number of months you have to pay PMI, which can save you hundreds of dollars.

Accounting for Property Taxes in Your Monthly Payments

The next few monthly mortgage fees are harder to account for because they are very specific numbers that aren't readily available.

Residential tax rates can vary greatly from one state or county to the next.  What's more, the taxable amount isn't based on the sales price of the home but rather the tax assessment. A county appraiser uses fair market value measurements to determine a monetary value for property tax purposes. This tax assessment is listed in the country tax records which can be found online.

In this case, let's use Plymouth County, Massachusetts for our example.  The Plymouth County property tax rate is .9%.  Our house is on the tax rolls at $170,000, which would mean the annual residential property taxes would be $1,530.  Spread out over 12 months, that would add $127.50 to the monthly payment.  Again, no mortgage calculator is going to be universal when it comes to figuring in taxes. 1,

Total monthly payment, including PMI and taxes: $1,340.22

Homeowners Insurance

Just like property taxes, any estimate of home insurance on a mortgage calculator is just that, an estimate. Many factors effect the cost of your homeowner's insurance, including:

  • Size of your deductible
  • Your local crime rate
  • Amount you want to insure
  • State you live in
  • Your credit score
  • Cost to rebuild your home
  • If you live in a floodplain
  • Age of the home

The average annual cost for home insurance is approximately $800 in the U.S. In Massachusetts the average is approximately $925 which adds an additional $77 a month to the example loan payment.

Total Monthly Mortgage Payment: $1,417.22

Where Mortgage Calculators Come in Handy

When using a mortgage payment calculator, also have a look at the amortization schedule.  This will break down how much of your payment is applied toward interest and how much toward principal over the life of your loan.  Don't be alarmed when you find out that your payments barely even make a dent in the principal for the first few years of the note! Luckily the interest is tax deductible.

Good calculators will also give you an estimate of how many months you can expect to pay PMI.



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