In 2021, the real estate market was dominated by people paying cash for their new properties. In fact, nearly one-third of all homes purchased last year were secured through cash-only transactions.
What’s catalyzing the move? Experts point toward the uptick in at-home, remote office positions that has allowed homebuyers to work from anywhere. As a result of this switch, they’re selling their more expensive homes in cities like New York and San Francisco and paying cash for a less-expensive home elsewhere.
Unless you plan to join these ranks, you can expect a mortgage payment when you buy your next house.
What is a mortgage, why do you have one, and how can you estimate what you’ll need to pay? Read on for the answers you need to know.
What Is a Mortgage?
A mortgage is a type of personal loan used to purchase or maintain one of the following properties:
- Home
- Land
- Another type of real estate
Banks and credit unions distribute mortgages to qualified individuals. Before you can enjoy access to your money, you will need to pass a verification process to prove that you’re financially stable. Much of this process revolves around your credit score.
A majority of credit scores hover between 300 to 850. The higher your score, the more financially responsible you will appear to a bank. A few of the factors that can affect your credit score include:
- Your bill-paying history
- Your current debt load
- The number of loan accounts you have open
- How long those accounts have been open
- Any new applications for credit
Once your bank reviews your application and credit score, they will issue you the mortgage. When you sign the loan agreement, you will confirm your intent to pay the lender back over a set period of time. You will do so by paying a set amount each month for the duration of your loan.
Principal and Interest
Mortgage payments include two important numbers that you need to know: principal and interest. Principal refers to the amount of money that you originally agreed to pay back. Interest is an extra amount added to the principal each month, as a fee for borrowing the money.
Different lending institutions will have their own interest rates, and there isn’t a one-size-fits-all percentage to know. This is how some banks compete with one another. If they can offer competitive, low-interest financing then they can appeal to a greater number of interested buyers.
However, be wary about banks that offer ultra-low interest rates. They might have very short repayment terms or other stipulations that you need to understand before moving forward.
Total Monthly Payment
When you review your mortgage bill each month, you may be confused to find that your principal and interest payment doesn’t precisely line up with the total monthly payment amount.
In most cases, the total monthly payment will be the higher of the two. This is because this number includes a few other expenses, such as:
- Homeowner’s insurance
- Taxes held in escrow
- Mortgage insurance (if applicable)
Note that if you live in a condo or a co-op, you may have additional fees included in your total monthly payment. These are usually set by your local homeowner’s association or HOA. The HOA is responsible for maintaining the grounds that a shared property sits on, enforcing community regulations, and managing the day-to-day activity of the neighborhood.
Analyzing Your Mortgage Payment
When you see your mortgage payment each month, you might focus on the total monthly payment amount. However, it’s important to understand this number relative to your local region.
In some areas, your mortgage will be high simply because the homes in your region are desirable. There may be a great-scoring school district, access to local shops and restaurants, and enjoyable recreation areas nearby.
Before you assume that yours is extra-high, you’ll need to know all of the factors that go into it. Next, let’s take a look at how your lender arrives at that number, and what those inputs mean.
Loan Amount
First, you’ll see the loan amount, also called the principal. This is the price you paid to purchase your home, minus the amount of the down payment.
A down payment is what you pay at the time of purchasing your home. Most lenders require it to be at least 20% of the home’s total sale price. If you cannot meet that figure, then you may be required to pay private mortgage insurance (PMI).
Banks charge PMI to protect themselves from defaulting on the loan in the event that you cannot pay your mortgage back in full over the agreed-upon timeline.
Annual Interest Rate
As mentioned, the interest rate is the fee that your lender charges to maintain the loan. If you see the term APR, this stands for Annual Percentage Rate. The APR and your monthly interest rate will vary slightly.
Loan Repayment Terms
This is the number of years that you have to pay back the loan.
While a longer-term loan might have a lower interest rate, be aware that this isn’t always the best. You could easily wind up spending more money with this type of loan, as you’ll continue to pay interest over the course of the mortgage contract.
Payments Per Year
This is the number of mortgage payments that you will make each year. If you are making monthly payments, then this number should be 12.
Type of Mortgage Loan
Next, you will see the type of mortgage loan that you have. There are a few different options, including:
- Adjustable
- Fixed-rate
- Interest-only
An experienced real estate professional can help you navigate all of the different mortgage options and suggest one that would be a good fit for your needs. This way, you can have an idea of what you require before you meet with a lender. If you live in Chicago, click the following link to connect with a qualified local team.
Other Factors
Other factors that may affect your monthly mortgage payment include the market value of your home, as well as your monthly income. Your lending agent will walk you through all of the individual expenses that you can expect.
Make sure to read all of these terms and conditions carefully before signing on the dotted line. Setting up a mortgage is one of the most substantial financial decisions you will make in your life, and you don’t want to rush into this process.
Calculating Your Mortgage Payment
When you’re ready to calculate mortgage payments, start by reviewing the exact type of loan that you have. Most loans are traditional, fixed-rate loans.
For example, you may have a 30-year mortgage or a 15-year mortgage. This means that the timeline will not change, and you can expect to pay the same amount each month. By the time you’ve reached the end of the term, you should have your loan paid back in full.
It might look complicated, but you can use the formula below to calculate your mortgage payment for a fixed-rate loan:
- P x (r / n) x (1 + r / n)^n(t)] / (1 + r / n)^n(t) – 1
Here’s a breakdown of what these letters mean:
- P: Principal
- r: Annual interest rate
- n: Number of payments per year
- t: Number of years that you have to repay the loan
Don’t feel like crunching those numbers yourself? You can also use an online mortgage payment calculator to get the job done in a matter of seconds! We recommend going this route over performing your own calculations, simply because the risk of human error is so high.
A Note on Affordability
When you meet with a lender, they may approve you for a mortgage that’s way higher than you originally thought you would qualify to receive. While it’s easy to get stars in your eyes and think about how much house that money could buy you, we urge you to exercise caution.
Just because you’re approved for a high loan doesn’t mean you should necessarily take it. Make sure that you earn enough money to comfortably make those monthly payments. If you don’t, then you could wind up defaulting on your loan.
This can render you ineligible to receive a mortgage loan down the road, so it’s definitely a mistake you don’t want to make.
Calculate Your Mortgage and Find Your Home
Knowing how to calculate your mortgage payment is part of becoming a responsible homeowner. While you can use the formula listed above, it’s usually easiest to trust the calculation to an automatic online calculator!
Yet, don’t enter your numbers and be done. Take the time to understand all of the factors that go into your mortgage, and look for ways to stay financially smart as you move forward. Then, you will be able to enjoy your home without draining your pockets.
Looking for tips to help you make the most of your new residence? Check out our Home Decor guides!
