Wondering How Big Your Mortgage Payment Will Be? Here's How to Find Out

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KEY POINTS

  • Monthly mortgage payments cover principal and interest due on a loan.
  • Many mortgage companies also require homeowners to put property tax and insurance payments into escrow.
  • Adding up the cost of principal, interest, taxes, and insurance can help you understand what you'll owe each month on your home loan.

If you are thinking about buying a house, you need to be prepared to take on monthly payments to do it. Most people don't have the cash to purchase a property outright so they need to get a mortgage to buy the property. Regardless of whether you have a home loan or not, you'll still have some costs to incur for things like taxes and insurance.

You'll ideally want to make sure your monthly housing costs don't exceed 30% of your income -- otherwise, you may not have enough money for other goals you need to accomplish to have a secure future and avoid debt. To ensure you stay within this recommended limit, you'll need to know how to calculate the size of your mortgage payment.

Here's how you can do that.

Figure out your principal and interest payments

When you make your monthly mortgage payment, the money from that payment goes toward covering:

  • Principal: This is the initial amount of money the lender actually gave you. As you pay down your principal, you owe less and have a larger ownership (equity) stake in your house.
  • Interest: This is the cost of borrowing. Any money paid toward interest doesn't reduce your balance. It goes to the lender to pay it for giving you the money.

When you borrow money, the bank calculates exactly how much you have to pay each month in principal and interest to fully pay off your debt by the due date. Most commonly, the goal would be to pay off your mortgage loan in either 15 or 30 years, since those are the two most common mortgage terms.

There are plenty of mortgage calculators online you can use to calculate principal and interest. The amount due for these will depend on your interest rate (the specific amount paid for borrowing), loan term, and total amount borrowed. As the table below shows, these factors can all make a big difference.

Mortgage term Amount borrowed Monthly payment if your rate is 6% Monthly payment if your rate is 7%
15 years $300,000 $2,532 $2,696
15 years $400,000 $3,375 $3,595
30 years $300,000 $1,799 $1,996
30 years $400,000 $2,398 $2,661
Data source: Author's calculations

To figure out how much your interest payments will be with different loans, consider the amount you want to borrow, the length of your loan term, and the mortgage rate your lender offers. With this information, you can use an online mortgage calculator to find out exactly how much principal and interest will be.

Add in taxes and insurance

Many mortgage lenders also require you to pay taxes and insurance as part of your monthly mortgage payment. They calculate the annual cost, divide it by 12, and collect that amount monthly. The money can then be put into an escrow account so it's ready to be used to pay for these expenses when they come due.

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You can find out how much taxes are on a property by doing a parcel search with your local property appraiser or department of revenue for your country. Searching for the address should give you these details. And you can get homeowners insurance quotes online by inputting the property address with different insurance companies. You can also ask the current owners about what taxes and insurance costs they're paying.

Just be aware that when the property changes hands, your taxes could go up because the property will usually be reassessed to determine its current market value. Also, any exemptions the prior homeowner had will be removed when the house is sold. But you can still get a fairly good idea of what you'll likely need to pay.

By taking these steps, you can determine if a given home is likely to be affordable for you or not. You could really come to regret buying a house that has a monthly payment that's too high, so you may want to "practice" making the larger mortgage payment before you commit. To do this, just transfer any extra money the mortgage will cost above the amount you're currently paying into a savings account. If you do this for a few months and it doesn't bust your budget, the home loan should hopefully be affordable to you over the long haul.

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