How to Calculate Your Mortgage Payment

Calculating your mortgage payment correctly may be harder than you think. Making sure that your projected monthly payment fits within your budget is crucial in determining that the house that you’ve picked out is actually affordable.

Before You Start Home Shopping

It’s a good idea to run some options in a mortgage calculator long before you ever start your home-buying journey. While property taxes and homeowners insurance can be hard to project on a home that you haven’t even picked out yet, our calculator allows you to estimate them.

Homeowners association (HOA) fees can be extremely common in some areas, particularly those with new construction and similar homes, but they are much less common in more established communities. HOA fees on some properties can constitute a large portion of your budget, so consider the type of home that you want to buy and look up one currently for sale to see if you can get an idea of the HOA fees. If you want a brand-new condominium in a community with plentiful amenities, expect to pay a hefty HOA fee. 

What to Include When Calculating Your Mortgage Payment

Your monthly mortgage payment is also referred to as principal, interest, taxes, and insurance (PITI). But the PITI acronym doesn’t quite encompass everything that you should include, such as:

• Principal and interest—Principal and interest is the amount that you’re paying for the loan itself. Principal is the balance of the money that you haven’t paid down toward the cost of the home itself. Interest is essentially the fee that you owe the lender for loaning you the principal for the length of the loan.
• Mortgage insurance premiums (MIPs)—Mortgage insurance premiums (MIPs) are usually required on Federal Housing Administration (FHA) mortgages and must be included in your monthly payment calculation. MIPs stay on your loan until you refinance to a non-FHA loan.
• Private mortgage insurance (PMI)—Private mortgage insurance (PMI) is typically required whenever you have a down payment of less than 20%. PMI can be removed once your equity in the home is equal to 20% or greater of the home’s value.
• Homeowners insurance—Homeowners insurance is required by every lender. It must be included in your mortgage payment calculation and is usually part of your escrow account.
• Property taxes—The amount that you pay in property taxes is highly dependent on your local area. In many areas, you can look up the exact property tax assessed on your property through your assessor’s office online. Be prepared, because the property tax that you pay can go up significantly after your sale, especially if you’re buying the property for substantially more than the amount for which it was last assessed.
• Homeowners association (HOA) fees—While HOA fees don’t fit neatly into the classic PITI acronym, if your property will have them, then they should be included in your monthly mortgage payment calculation. They are rarely included in your escrow account, but you could lose your home if you don’t pay them.
  

Determine What You Can Afford

Simply accepting the amount that the lender says you can pay is a recipe for stress and potential disaster. If you’re living paycheck to paycheck, as millions of Americans are, then give yourself some wiggle room in your monthly payment amount.

Set up an automatic savings draft of the difference in payments to go directly to your emergency fund. Once your emergency fund is filled, set it to go to your retirement account. Doing this will help you weather financial storms such as a job loss, a major home repair, or an unexpected health expense.

If you’re a two-income household, then qualifying for the mortgage off one income (even if you both intend to take on the mortgage) can give you significant financial freedom if one of you needs to take time off from a job. Make sure that your monthly mortgage payment is something that you can easily afford and isn’t a budget stretch that you would struggle to come up with after meeting an unexpected expense.

The Bottom Line

Before you even start shopping for a home, you should start playing with mortgage calculators and your budget to determine what you can truly afford. Your mortgage payment calculation should include principal, interest, taxes, and insurance (PITI), as well as any HOA, PMI, or MIP payments. While not part of your calculation, you absolutely should keep in mind other costs that come with owning a home, such as increased utility and repair costs, to make sure you can truly afford the home that you’ve picked out.