Your mortgage payment is the amount of money you have to pay each month to the lender who issued your home loan. It is important to know what your monthly mortgage payment will be and to make sure that you are comfortable paying that amount before you buy a home so you can avoid foreclosure.
Estimating a Mortgage Payment
There are several different costs that go into a mortgage payment. Two of the costs you will always pay are a payment towards the principle and a payment towards the interest. The principle is the original amount that you borrow- for example, if you borrow $100,000, then this is the principle you owe. The interest is the amount that you pay for the cost of borrowing the money. Each month, you have to pay the interest that has accrued since your last payment. You also have to pay a certain amount of money intended to make the principle (that original $100,000 balance) decline.
The amount of the principle that you have to pay is determined based on how long your mortgage term is. For instance, if you borrow $100,000 and take a 30 year mortgage, you will need to pay enough towards the principle each month that the $100,000 will be paid off in full over the course of 30 years.
The shorter your mortgage term and the higher your interest rate, the higher your monthly payments will be.
In addition to the principle and the interest, there are also other costs associated with housing. These include property taxes and insurance. Often, the mortgage lender will collect money each month from you that is intended to pay the property taxes and the insurance. This money will be “escrowed” or put into a special account until taxes and the insurance bill need to be paid. The lender will then pay this amount.
Because these are often included in a mortgage, you may wish to factor these costs in as well when estimating your mortgage payment. Your lender will factor these costs in when determining whether you make enough money to qualify for your mortgage and make the payments. This is where the acronym PITI comes from. PITI refers to principle, interest, taxes and insurance. It is an acronym you will hear mortgage lenders use a lot.
Figuring out how much you are going to pay in principle and in interest can be complex. As such, the easiest way to estimate your mortgage payments is to simply use an online calculator to do so. There are numerous calculators available on the web, including Primerates or Real Estate ABC, that allows you to take account of the principle, interest, taxes and insurance.
To use the calculator:
- Input the term of your mortgage. If you aren’t sure, then use a 30-year fixed since this is the safest and most common type of mortgage.
- Input the interest rate. If you don’t already have an interest rate from your lender, use the prevailing market rates available on Wells Fargo’s website.
- Input the loan amount. This should be equal to 80 percent of the cost of the home you are buying since most banks won’t lend more than 80 percent.
- Input the annual tax amount. You should be able to find this on the real estate listing for the home you are considering buying, or by doing a public records search for your area.
- Input the amount you will pay for insurance. An insurance agent can help you to determine this, or you can guess at a rough estimate.
Once you have input all of the information, hit “Calculate now.” Your estimated monthly mortgage payment for PITI will display in the boxes below, giving you a detailed picture of how much you will have to spend each month for your mortgage costs.