A mortgage is a loan that gives you the money to buy a home. In exchange, you promise to pay the lender back at a specified time. The loan typically lasts for 30 years in the U.S. Over the life of the mortgage, youll make regular payments that cover both the original amount of money you borrowed and interest on that debt.
How to Calculate a Mortgage Payment
A home purchase is the largest financial commitment you will ever make, and a mortgage can be the biggest single loan youll take out. Understanding how your mortgage works and what you can expect will help you get the best deal on your home loan.
The size of your monthly mortgage payment depends on three things: how much you borrow, your interest rate and your other expenses. Your down payment, the percentage of your purchase price you put toward the home, can also affect your payment.
Your interest rate is the rate at which your lender will lend you the money for the home, and its largely determined by market factors outside your control. A high interest rate means that youll pay more on your mortgage each month. You can avoid higher payments by choosing a lower interest rate.
If you have a higher credit score and less red flags on your credit report, your lender will be more likely to approve you for a mortgage. This is because it shows that youre a low-risk borrower.
Buying a home requires more than just money — you also need to know how to use it wisely. This includes knowing how to calculate your mortgage payment, how to choose a mortgage loan thats right for you and how to protect your credit during the mortgage process.
How to Calculate a Monthly Mortgage Payment
To calculate your mortgage payment, first look up the base mortgage rate (which you can find in the interest rate section of your loan documents) on your lenders website. Then, divide that rate by 12 to get a monthly rate. Next, add 1 to the monthly rate to get the number of payments youll make over the course of the mortgage.
When youve figured out your mortgage payment, remember to account for your property taxes, homeowners insurance and monthly HOA or condo fees. These costs are added into your mortgage payments into an escrow account thats managed by the lender. These costs may increase or decrease over the lifetime of your mortgage, depending on how the market affects the cost of those items.
If you have a higher down payment, your monthly mortgage payment will be lower. Having a sizable down payment will also improve your chances of qualifying for the best mortgage rates.
The size of your down payment will also affect your tax deduction. In the United States, you can deduct mortgage interest on your federal income tax return only if you itemize. However, your state may allow you to claim this deduction as well.