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Your monthly mortgage payment contains principal and interest, as well as other expenses such as property taxes, hazard insurance, and mortgage insurance, if applicable. The amount of the monthly payment depends on the location and age of the property, as well as the loan amount, the interest rate, and the term, or length of the loan in years.

Principal and interest (P&I): The basics of a mortgage payment

The main part of a mortgage payment is your principal and interest. While your payment stays constant throughout the term of your loan (provided it's a fixed-rate mortgage), the mathematics of mortgage amortization means that more of your early payments will go toward interest, while more money will go toward paying down the principal in the later years.

For example, let's take a $250,000 fixed-rate mortgage with an interest rate of 4% and a term of 30 years (360 payments total). Here's a sample of how your $955 monthly principal and interest payments would be applied, depending on how far along your mortgage is:

Payment Number

Principal

Interest

1

$288

$667

60

$351

$604

180

$523

$432

300

$779

$175

Source: Bankrate.com.

Other items in your mortgage payment

There are three other items that are commonly included in a mortgage payment:

Property taxes: This expense can vary tremendously depending on where the home is located. For example, the average property tax bill on a $300,000 home is $7,140 per year in New Jersey, but just $1,290 in Alabama. You'll generally be required to prepay a certain amount of property taxes at closing and then pay one-twelfth of the annual amount with each mortgage payment.

Hazard insurance: For most people, a homeowner's policy will be sufficient, and it generally costs about 0.5% of your home's value per year, though it could cost more depending on the age of the home and several other factors. If you're located in a flood-prone area, then you'll also need flood insurance, and if you're in a coastal location subject to hurricanes, you might also need windstorm coverage. There are several other types of insurance you might need, so ask a local lender what you should expect.

Mortgage insurance: If you put less than 20% down when buying the home, then most loan programs will require mortgage insurance. Some loan programs, like those sponsored by the Federal Housing Administration (FHA), have an up-front premium, as well as an annual premium. It's important to note that with conventional loans, you can drop the mortgage insurance after your loan-to-value ratio has fallen to 80%; however, FHA mortgage insurance cannot be dropped as long as the loan is active.

Estimate your mortgage payment

With all of that in mind, here's a calculator that can help you figure out your new mortgage payment. For the most accurate results, it's a good idea to find the property's actual tax data -- you can find this through county records or through websites like Zillow -- and an actual hazard insurance quote.

 

* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

How much is too much?

Most lenders use two debt ratios when determining your maximum mortgage payment. The amount of your mortgage payment as a percentage of your income is known as the front-end ratio, and lenders generally like to see 28% or less. The back-end ratio includes all of your debts, and as a general rule of thumb it should be 36% or less. Some lenders will go higher: For example, Fannie Mae's lending standards permit back-end ratios as high as 45% with adequate credit and reserves.

However, just because you can get approved for a mortgage doesn't mean you can actually afford it. There are several factors that go into home affordability -- for instance, if you're paying college tuition for your child, then your budget might be a little too strapped to take on the maximum allowable mortgage payment. So it's important to make sure your new mortgage payment fits into your own budget before signing the contract.

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