Let’s talk mortgage payments. When buying a home, what would your mortgage payment be? How do I calculate a mortgage payment? How much of a payment can I afford? Will a refinance lower my mortgage payment? How will a cash out refinance affect the payment? Is there a calculation I can do by hand?
Step One
The first step for a person buying a home is usually to get a good idea of what house payment they feel comfortable with. And also to find out how much you have to pay for different price ranges and home types. In this video, we’re going to show you how to calculate a payment for a home price. Like, how much is a payment for a $450,000 home? What factors can change that payment up or down besides the price? To figure this out we need to know a couple of things up front. What goes into a monthly payment? What type of loan are we going to do? How much is the loan size we need? Let’s start with the first one. What goes into a monthly house payment? A home lender always lumps the parts of your payment into one total amount due each month. Let’s break the parts down. First, is the principal. This is the part of the payment that goes towards paying down the loan. Many people are surprised to find how little of their payment goes to principal early in the loan.Step Two
The second piece is your interest portion. Interest is just a clever spelling of bank profit. Your interest rate is decided by the program you use and the level of risk you are to the bank. Things that make you more or less risky are how much of a down payment you can bring, your credit score, the type of property you’re buying, and the length of time you need to borrow the funds.Step Three
Next is property taxes and insurance. Property taxes are determined by the area you live in and how many state and local taxes are being collected for community upkeep. Like schools, infrastructure, and police environment.Step Four
Home insurance covers your home from unexpected damage or loss and is dependent on the loan size, the type, and the area of the home. The above four parts are part of every home loan payment. But the next one could be optional.Step Five
The fifth piece you might have in your payment is mortgage insurance. Sometimes called private mortgage insurance and also sometimes abbreviated to MI or PMI. They’re all basically the exact same. Mortgage insurance is different from home insurance and unlike home insurance, does not insure you, but instead insures the bank against you. You will find mortgage insurance on any loan that a homeowner does not have at least 20 percent of the home’s value and down payment or equity. This means, if a home is a hundred thousand dollars, and you can bring a down payment from your savings for ten thousand. And to need a loan for the other ninety thousand, that’s only ten percent down payment. And so you’re going to need the mortgage insurance on the loan. Let’s pretend you already own the home and it’s worth a hundred thousand. But you’re getting a new loan to lower your payments and your loan size is only eighty thousand. Then you would not need mortgage insurance because you are leaving twenty thousand or twenty percent in equity in the home. An exception to the 20 percent rule is FHA loans. They always require mortgage insurance for the life of the loan no matter how much equity you have. The amount of mortgage insurance can change based on your risk factors. Just like your interest rate mentioned before.Examples
Now that we know the parts, let’s look at some examples. You might be asking, “Nick, do I need an online calculator? Is there a calculation I can do by hand?” Well, here’s the formula for the principal and interest payment. Oh, brush off your old high school math book because yuck. That thing is hideous. For that reason, if you want to take a crack at it, be my guest. But I’m instead going to be using my custom built mortgage calculator. The reason I like this is because it shows different loan programs and different down payments side by side. Unlike the generic calculators that live out there in the world.Here’s how you want to do this:
The first thing you want to do is look up an interest rate to put in here. Now I’m just putting in a dummy rate for all of these options. What next to do is to put in a purchase price up here at the top. We’re going to put in 400,000. You’ll see that it estimates monthly taxes and home insurance for you. Your third step is to fill out the income and debts portion. I’ll put in some dummy info here. Now what you’ll notice, is that this debt to income ratio has lit up. Anytime this turns red, that means you likely will not be able to afford that particular house and payment option. But for these three options here, you likely can afford those as your debt to income is showing not in the red and below 50 percent. What else is nice about this calculator, is that it will give you an estimated amount of money you’d need at closing. As well as showing you some examples of what your possible closing costs could be and some other prepaid and escrow items. As an extra added bonus down in the corner, you’ll see a payment calculator. In here you’re going to find two different scenarios. Home purchases and home refinances. For this you’ll want to start again by putting in the interest rate and your credit score estimate. For the home purchase size you can put in your purchase price again and your down payment and it will tell you if you need mortgage insurance or not and estimate a monthly payment for you. If you need mortgage insurance it’s going to use some numbers I’ve put together as other estimates over on the side here, based on your credit score. On the home refinance side you’ll notice you’ll need to do the same. Put in your estimated home value, how much home loan you have left to pay, and it will estimate these numbers here for you and tell you if you need mortgage insurance. Again you’ll want to put in an interest rate and your credit score estimate and it will estimate a payment for you below. On the right hand side you’re also going to see some estimates of what your taxes and insurance will be based on what I’ve seen historically. Now your area might be different, so definitely check with your MLS to see if these are higher or lower. If you want any help on this, you can always reach out. Okay, now we know what your estimated payment will be. But how can you know if you can afford that payment? I’ve done a video on this as well and put the link in the description. But here’s a really quick rule of thumb. Take your before tax income and cut it in half. Then subtract any minimum payments for credit cards, car payments, and student loan payments. What you’re left with is roughly what you can afford for a home payment. “Nick, will a refinance lower my monthly payment?” Well yes. Typically a refinance will lower your payment. This is typically the goal of a refinance, unless you’re looking to get some money out of your house. This is also known as a cash out refinance. Let’s talk more about this cash out refinance.How Will a Cash Out Refinance Affect My Mortgage Payment?
Well this is a great question and unfortunately the answer is, it depends. Oftentimes taking cash out of your home through a refinance will raise your payment. But in a lot of cases, depending on if you can get a lower interest rate, or are getting a longer loan term than what you had before, your payment can stay the same or even go down with the cash out refinance. I’ll provide you with my calculator for this as well in the description below. If you need help with this, our team is dynamite. We would be delighted to help you with your home mortgage payment needs.Latest Articles
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