How To Calculate Your Monthly Mortgage Payment: A Guide

There’s no shortage of information to consider when taking out a mortgage or refinancing your home. Perhaps most essential of all is how much your monthly mortgage payment will be. You’ll want to be aware of this number so you can ensure your mortgage payment fits into your budget.

Thankfully, it’s possible to calculate your monthly mortgage payment ahead of time so you’ll know exactly what to expect and can budget accordingly.

Why Calculating Your Estimated Mortgage Payment Is Important

When buying or refinancing a home, knowing the size of your mortgage payments – or at least an estimate of their size – will help you with other key considerations.

You Can Determine How Much Home You Can Afford

While your lender may qualify you for a particular loan amount, that doesn’t necessarily mean the monthly payment amount will fit comfortably into your budget. It’s important to know your estimated monthly payment before purchasing a home. This way, you can determine how much house you can actually afford to buy.

You Can Budget For Monthly Living Expenses

Knowing about how much your monthly mortgage payment will be allows you to budget for your monthly living expenses. Perhaps even more critical, knowing how much you’re spending on your mortgage payment helps you figure out how much money you’ll have left over each month.

As a result, you’ll be able to make more informed decisions about how much money you can allocate to other expenses. Knowledge is power as it relates to your finances. 

Breaking Down Your Monthly Mortgage Payment

Before you can calculate your monthly mortgage payment, you’ll need to know the variables that go into it. They include:

• Loan amount: If you’re buying a home, you’ll need to put in the asking price of the houses you’re looking at and subtract your down payment. If you’re refinancing, include the expected balance after you close.
• Interest rate: Although largely dependent on market factors beyond your control, your interest rate has a huge impact on what your monthly mortgage payments will be. When calculating your payment, look at the base mortgage rate and not the annual percentage rate (APR) since your interest rate (the base rate) won’t reflect closing costs – which have no bearing on your monthly payments unless rolled into the loan.
• Loan term length: This is how long you have to pay the loan off. A longer repayment term such as a 30-year mortgage will mean smaller monthly payments but more interest paid, while a shorter repayment term will mean larger payments but paying less in interest overall.
• Mortgage insurance: If you make a down payment of less than 20%, you’ll have to pay private mortgage insurance (PMI) on a conventional loan until you reach 20% equity. FHA loans have mandatory insurance premiums that may last for the life of the loan, depending on your down payment amount.
• Property taxes: Since property taxes are typically built into your mortgage payment, a reasonably accurate estimate of your property taxes will provide a better picture of the cost. Regardless of whether you have an escrow account, you’ll need to account for property taxes when determining the total cost of homeownership.
• Homeowners insurance: Mortgage lenders will require you to carry homeowners insurance to protect your home and their investment. If you have an escrow account, the annual premium is divided into monthly payments, but you should factor in the cost of homeowners insurance regardless.
• Homeowners association (HOA) fees: Homeowners association (HOA) fees typically aren’t included in your monthly mortgage payment, but it’s important to budget for a monthly or annual fee as part of your overall housing costs.

How To Calculate A Mortgage Payment

It’s possible to go about calculating a monthly mortgage payment in a couple of ways. You can figure it out by using a formula, or you can use a mortgage payment calculator.

Use The Formula

The easiest way to calculate your mortgage payment is to use a mortgage calculator. However, a basic understanding of the formula can give you an idea of how the different variables impact the outcome of the equation found here:

M = P [ I(1 + I)^N ] / [ (1 + I)^N − 1]

This formula will help you calculate your mortgage payment based on the loan principal and interest before taxes, along with homeowners insurance and HOA fees. If the formula feels a little intimidating at first, you’re probably not alone in how you perceive it.

Here’s the breakdown::

• M = Monthly payment: This is what you’re solving for.
• P = Principal amount: This is the loan balance, or the amount you’re trying to pay off.
• I = Interest rate: Remember, you’ll want to use the base interest rate and not the APR. Additionally, your mortgage interest rate is an annual interest rate that represents the interest that’s supposed to be paid monthly over the course of the year, so you’ll need to divide this by 12 to get the monthly interest rate.
• N = Number of payments: This is the total number of payments in your loan repayment term. For instance, if it’s a 30-year mortgage with monthly payments and you always pay the minimum amount, you’ll make 360 payments.

Having your own formula set up also gives you the opportunity to compare different payment scenarios. While the formula covers principal and interest, you can add in taxes and insurance once you know their respective amounts. This will add up to your total monthly payment.

Use A Mortgage Calculator

Generally, you’re better off using a mortgage calculator to calculate your mortgage payment. That’s because it’s difficult to input the formula properly in a regular calculator.

Using a mortgage calculator takes the guesswork out of the formula and can help you calculate your mortgage payments much faster. Several types of mortgage calculators exist, and it’s a good idea to understand the purpose of each one so you can be sure you’re using the one that’ll best serve your needs.

3 Types Of Mortgage Calculators

A few types of mortgage calculators can prove helpful depending on your situation:

1. Purchase calculator: A purchase calculator allows you to figure out how much cash you need for a down payment, or you can figure out how much you can afford based on your down payment and monthly income. You’ll need information such as the sales price and your down payment, credit score, income, debts and ZIP code.

2. Refinance calculator: A refinance calculator can help you determine whether a new mortgage loan makes sense for your situation. You’ll need to know your home’s estimated value, your mortgage balance and how long you plan to stay in your home, in addition to your income, debts and credit score.

3. Amortization calculator: A mortgage amortization calculator can show you how much interest and how many months of payments you can save by putting extra money toward your principal payment. You’ll need to input your loan amount, loan term length, interest rate and the state you live in.

What Can A Mortgage Calculator Help With?

Whether you use the formula or a mortgage calculator, calculating your potential mortgage payment should help you have a more informed home-buying budget or decide whether to move forward with a refinance. It all depends on your financial situation, lifestyle and personal goals.

Here’s some valuable information a mortgage calculator can unlock:

• Your ideal loan repayment term: A mortgage calculator can help you determine whether you’d benefit from a shorter or longer loan term. Again, a shorter repayment term means higher monthly payments with less interest, while a longer repayment term means paying more in interest but a lower monthly payment.
• The best home loan option for you: Any handy, dependable calculator will reveal the loan products you might qualify for. You may see several options available to you through your lender.
• Whether the home is too expensive: A mortgage calculator can also help you determine how much house you can afford. This is based on factors such as your income, credit score and any outstanding debt you owe.
• Determining the right down payment amount: A purchase calculator can help you determine the down payment you need. Each loan type requires a minimum down payment of some or no amount, but putting more than the minimum down will mean a lower monthly payment and the opportunity to possibly avoid PMI if you’re financing with a conventional loan.
• Whether you should rent versus owning a home: When deciding whether to rent or buy, you have to know how much you need for a down payment. You should also determine whether owning a home will be cheaper or require you to pay more each month than you did while renting.

The Bottom Line

A central part of the home buying process as a buyer is knowing how much house you can afford. One way to help ensure you won’t be in over your head financially is to calculate your likely monthly mortgage payment using figures such as the sales price of the home, the amount of your down payment and your interest rate.

If you’re ready to take this next step and begin the home buying journey, you can start your mortgage application online with Rocket Mortgage^® today.