How to Calculate Your Mortgage Payment

It could be more difficult than you think to appropriately calculate your mortgage payment. To determine if the home you’ve chosen is genuinely reasonable, it’s critical to make sure that your expected monthly payment is within your spending limit.

Key Takeaways

• To ensure that your mortgage payments will fit inside your budget, calculate your mortgage payments before you begin looking for a home and often while the process is ongoing.
• Principal, interest, taxes, and insurance make up your monthly mortgage payment (PITI).
• Include any homeowners association (HOA) fees, mortgage insurance premiums (MIPs), or private mortgage insurance in addition to principal, interest, and taxes (PITI) (PMI).
• When creating your budget, be careful to account for utilities and maintenance expenditures for your new home even if they are not covered by your mortgage payment.

Before You Start Home Shopping

Before you even begin the process of purchasing a house, it’s a good idea to run some choices through a mortgage calculator. Although it might be difficult to anticipate property taxes and homeowners insurance on a house that you haven’t even decided on yet, our calculator enables you to do so.

In certain places, especially those with new construction and comparable houses, homeowners association (HOA) fees may be quite prevalent. However, they are far less prevalent in older established neighborhoods. Consider the style of property you want to purchase and search for one that is presently for sale to see if you can get an idea of the HOA costs. HOA fees on certain homes may make up a significant amount of your budget. Expect to pay a large HOA fee if you want a brand-new condominium in a neighborhood with plenty of facilities.

Interest Rates

As mortgage interest rates rise quickly, make sure you often use the calculator to see whether you are still looking for a property in the appropriate price range. Average mortgage rates increased from 3.76% in February 2022 to 4.17% in March 2022, and they continued to rise throughout the first two weeks of April 2022.

What to Include When Calculating Your Mortgage Payment

Principal, interest, taxes, and insurance is another name for your monthly mortgage payment (PITI).However, the PITI acronym doesn’t exactly cover all you need to, like:

• Principal and interest—Paying principal and interest is what you do to repay the debt. The amount you still owe on the principal of your mortgage is known as the principal. In essence, interest is the price you pay to the lender in exchange for them lending you the principle throughout the course of the loan.
• Mortgage insurance premiums (MIPs)—Mortgage insurance premiums (MIPs) are often necessary for Federal Housing Administration (FHA) loans and must be accounted for when calculating your monthly payment. Until you refinance to a loan that is not an FHA loan, MIPs remain on your loan.
• Private mortgage insurance (PMI)—Whenever you have a down payment of less than 20%, private mortgage insurance (PMI) is often necessary. Once your home equity reaches 20% or more of the house’s value, PMI may be cancelled.
• Homeowners insurance: Every lender demands homeowners insurance. It is often a component of your escrow account and must be taken into account when calculating your mortgage payment.
• Property taxes—The amount of property taxes you pay greatly depends on your neighborhood. You may often check the precise property tax imposed on your property online via your assessor’s office. Be ready since, particularly if you’re paying a lot more than what the property was previously assessed for, your property tax bill may increase drastically following your sale.
• Fees for homeowners associations (HOAs)— Although HOA dues don’t neatly fit into the traditional PITI acronym, they should be taken into account when calculating your monthly mortgage payment if your house will have them. They are seldom included in your escrow account, but if you don’t pay them, you risk losing your house.

Determine What You Can Afford

Simply accepting the amount that the lender says you can pay is a recipe for stress and potential disaster. If you’re living paycheck to paycheck, as millions of Americans are, then give yourself some wiggle room in your monthly payment amount.

Set up an automatic savings draft of the difference in payments to go directly to your emergency fund. Once your emergency fund is filled, set it to go to your retirement account. Doing this will help you weather financial storms such as a job loss, a major home repair, or an unexpected health expense.

If you’re a two-income household, then qualifying for the mortgage off one income (even if you both intend to take on the mortgage) can give you significant financial freedom if one of you needs to take time off from a job. Make sure that your monthly mortgage payment is something that you can easily afford and isn’t a budget stretch that you would struggle to come up with after meeting an unexpected expense.

Should I include anticipated utility costs in my monthly payment calculation?

You shouldn’t include utilities in your monthly mortgage payment calculation, but it’s important to consider and include them as part of your budget. If you’re used to renting a 900-square-foot apartment, expect your utility expenses to go up significantly in a 2,000-square-foot home, in addition to new utilities such as trash, water, and sewer that you may not be used to paying directly, depending on where you currently live.

Should I include projected repair costs in my monthly payment calculation?

Repair costs aren’t something that you should include in your monthly payment calculation, but you absolutely should keep them in mind. If the property that you are considering is in need of significant repairs or renovations, then you absolutely will need to consider how you will cover those costs before you sign on to a mortgage on the home.

When is my first mortgage payment due?

Your first mortgage payment is due the first of the month after your first 30 days in the home. For example, if you close on your home on Jan. 5, then your first payment isn’t due until March 1.

The Bottom Line

Before you even start shopping for a home, you should start playing with mortgage calculators and your budget to determine what you can truly afford. Your mortgage payment calculation should include principal, interest, taxes, and insurance (PITI), as well as any HOA, PMI, or MIP payments. While not part of your calculation, you absolutely should keep in mind other costs that come with owning a home, such as increased utility and repair costs, to make sure you can truly afford the home that you’ve picked out.

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