When budgeting for a mortgage, it is important to include all associated costs beyond the price of the home so that there are no surprises as you proceed. Monthly mortgage payments cover the loan's four main aspects – the principal, interest, taxes, and insurance (PITI). There are additional costs to consider when calculating your monthly mortgage payment to make sure you are getting a loan that you can afford.
Once all of the pertinent data and information are collected, you can calculate the monthly payments using an online mortgage calculator or using a spreadsheet to run the numbers.
How Much Home Can You Afford?
Buying a home is a major investment that will play a major role in your financing and budgeting for many years to come. It is essential to know exactly what is coming before making an offer and finalizing a sale. Taking the time to understand the various aspects of a home mortgage and figure out your monthly payments will set up reasonable expectations and set you up for success.
To figure out if you can afford to buy a home and how much you can spend, you will need to start by calculating the basic PITI elements that will form the foundation of your monthly payments.
The principal is the amount of money you owe on the home's actual cost after the down payment is made. Monthly mortgage payments will pay down the principal, though interest will continue to be added to the total.
Interest consists of the fees your bank is charging you for the loan. The interest rate will be determined by the lender when you apply for the mortgage. If you have a high credit score, you are seen as a lower risk and can get a lower interest rate. For fixed-rate loans, the interest will not change over the life of the loan. The interest rate will rise or fall with the markets for adjustable-rate mortgages.
Real estate or property taxes are collected to pay for schools, law enforcement, public parks, and other community expenses. Your property taxes are largely based on your home's value and can change from year-to-year depending on the market value of the home. The local government tax agency or your lending institution should provide tax estimates for the home.
Homeowners insurance is designed to protect your investment from natural disasters, theft, and other liabilities. Taking the time to get multiple quotes for your insurance needs will help you get the best policy for your situation and budget.
In addition to the PITI items, there are additional monthly fees and costs that you will need to figure into your overall household budget. You will need to include these items in your budget to accurately assess your monthly expenses. The following are additional expenses beyond the PITI elements included in your mortgage payments.
Homeowners Association Fees
If you live in a neighborhood with a homeowners association (HOA) or condominium complex, your fees go towards common areas and paying for community amenities, such as a fitness center, swimming pool, landscaping services, and parking lot repairs and maintenance. HOA fees are typically paid directly to the association but should be considered part of your monthly homeowner costs.
Private Mortgage Insurance
Homebuyers unable to put down a down payment of at least 20 percent must purchase private mortgage insurance (PMI) to protect the lender from a loan default. The cost of PMI is added to the monthly payments to the lender. When your home equity reaches 20 percent, you can request the bank remove the PMI payment.
Maintenance and Repairs
Will you need to hire a landscaper or purchase home lawn care equipment? What is the condition and life expectancy of the roof, HVAC system, and major appliances in the home? Home maintenance and repair estimates are based on the age of the home's operating systems and should be included in your monthly budget. Financial advisors highly recommend establishing an emergency household savings fund that can be used for unexpected expenses.
Calculating Monthly Payments
The most important aspect when calculating monthly mortgage payments is to include all possible expenses. It is far better to overestimate expenses than have surprise costs pop up that you have not budgeted for. Monthly payments can be figured by hand through a spreadsheet that can calculate your mortgage's principal and interest.
To calculate your monthly mortgage payments by hand, the following equation takes into account expenses other than taxes and insurance:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
“P” represents the principal loan amount, “i” represents your monthly interest rate payments, and “n” indicates the number of months required to repay the loan.
Property tax and homeowners insurance are fixed costs that will not be affected by the amount borrowed for the loan. These costs can easily be added to the amount determined by the equation represented by M.
Online Mortgage Calculator
An online mortgage calculator can do the math for you and provide an accurate estimate for monthly payments when you buy or refinance a home. Being able to input the figures with immediate calculations allows you to compare rates and terms to get the best deal that fits your budget and needs.
Get Help Calculating Monthly Mortgage Payments
The terms and details of your mortgage will impact your financial standing for years to come. It is essential to understand all aspects of your home loan and the payment schedule you will be using throughout the life of the mortgage.
At SimpleShowing, talented, experienced real estate professionals can help you navigate the complicated and confusing process of acquiring a mortgage. Contact a knowledgeable representative for complete information on the wide range of realtor services to assist in the home buying experience.