More often than not, a homeowner who borrowed money to buy a house is making one lump-sum monthly payment to their mortgage lender. But while it may be called the monthly mortgage payment, it includes more than just the cost of repaying their loan, plus interest.
For many of the millions of American homeowners carrying a mortgage, the monthly payment also includes private mortgage insurance, homeowners insurance, and property taxes.
It’s possible to estimate your total monthly payment by hand using a standard formula, but it’s often easier to use an online calculator. Either way, here’s what you’ll need:
How to calculate a mortgage payment
1. Determine your mortgage principal
The initial loan amount is referred to as the mortgage principal. For example, someone with $100,000 cash can make a 20% down payment on a $500,000 home, but will need to borrow $400,000 from the bank to complete the purchase. With each monthly mortgage payment, the principal will be reduced, but interest will be added.
2. Calculate the monthly interest rate
The interest rate is essentially the fee a bank charges you in order to borrow money, expressed as a percentage. Typically, a buyer with a high credit score will secure a lower interest rate – the risk of loaning that person money is lower than it would be for someone with bad credit.
Lenders provide an annual interest rate for mortgages. If you want to do the monthly mortgage payment calculation by hand, you’ll need the monthly interest rate – just divide the annual interest rate by 12 (the number of months in a year). For example, if the annual interest rate is 4%, the monthly interest rate would be 0.33% (0.04/12 = 0.0033).
3. Calculate the number of payments
The most common term for a fixed-rate mortgage is 30 years or 15 years. To get the number of monthly payments you’re expected to make, multiply the number of years by 12 (number of months in a year).
A 30-year mortgage would require 360 monthly payments, while a 15-year mortgage would require exactly half the number of monthly payments, or 180. Again, you only need these more specific figures if you’re plugging the numbers into the formula – an online calculator will do the math itself once you select your loan type from the list of options.
5. Find out whether you need private mortgage insurance
Private mortgage insurance (PMI) is required if you put down less than 20% of the purchase price on a home. Most commonly, your PMI premium will be added to your monthly mortgage payments by the lender, according to the Consumer Financial Protection Bureau.
The exact cost will be detailed in your loan estimate, but according to Freddie Mac, homeowners can expect to pay between $30 and $70 a month, per every $100,000 borrowed.
Oftentimes, PMI can be waived once the homeowner reaches 20% equity in the home.
6. Consider the cost of property taxes
A monthly mortgage payment will often include property taxes, which are collected by the lender and then put into a specific account, commonly called an escrow or impound account. At the end of the year, the taxes are paid to the government on the homeowners’ behalf.
How much you owe in property taxes will depend on local tax rates and the value of the home. Just like income taxes, the amount the lender estimates the homeowner will need to pay could be more or less than the actual amount owed, which could result in a bill or a refund come tax season.
You can typically find your property tax rate on your local government’s website.
7. Consider the cost of homeowners insurance
Almost every homeowner who takes out a mortgage will be required to pay homeowners insurance – another cost that’s often baked into monthly mortgage payments made to the lender.
There eight different types of homeowners insurance, according to Policygenius. The insurance policies with a high deductible will typically have a lower monthly premium.
Compare homeowners insurance rates and policies with Policygenius »
7. Calculate your monthly payment by hand
You can calculate your monthly mortgage payment, not including taxes and insurance, using the following equation:
M = P [ i(1 + i)n ] / [ (1 + i)n – 1]
P = principal loan amount
i = monthly interest rate
n = number of months required to repay the loan
Once you calculate M (monthly mortgage payment), you can add in the monthly property tax and homeowners insurance premium, if you have them. These are fixed costs that aren’t determined by how much you borrow from the bank, so they can easily be added to the monthly cost.
8. Run the numbers through an online mortgage calculator
If math isn’t your strong suit, try an online mortgage calculator that includes insurance costs and taxes. These can spit out a pretty accurate picture of the monthly payment you will make to the lender. An online calculator can also help estimate taxes and insurance costs.