How to calculate a mortgage payment
Under "Home price," enter the price (if you're buying) or the current value (if you're refinancing). NerdWallet also has arefinancing calculator.
Under "Down payment," enter the amount of your down payment (if you’re buying) or the amount of equity you have (if refinancing). Adown paymentis the cash you pay upfront for a home, andhome equityis the value of the home, minus what you owe.
On desktop, under "Interest rate" (to the right), enter the rate. Under "Loan term," click the plus and minus signs to adjust the length of the mortgage in years.
On mobile devices, tap "Refine Results" to find the field to enter the rate and use the plus and minus signs to select the "Loan term."
You may enter your own figures forproperty taxes,homeowners insuranceandhomeowners association fees, if you don’t wish to use NerdWallet’s estimates. Edit these figures by clicking on the amount currently displayed.
The mortgage calculator lets you click "Compare common loan types" to view a comparison of different loan terms. Click "Amortization" to see how the principal balance, principal paid (equity) and total interest paid change year by year. On mobile devices, scroll down to see "Amortization."
» MORE:What is mortgage amortization?
Formula for calculating a mortgage payment
The mortgage payment calculation looks like this: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
The variables are as follows:
M = monthly mortgage payment
P = the principal amount
i = your monthly interest rate. Your lender likely lists interest rates as an annual figure, so you’ll need to divide by 12, for each month of the year. So, if your rate is 5%, then the monthly rate will look like this: 0.05/12 = 0.004167.
n = the number of payments over the life of the loan. If you take out a 30-year fixed rate mortgage, this means: n = 30 years x 12 months per year, or 360 payments.
How a mortgage calculator helps you
Determining what your monthly house payment will be is an important part of figuring out how much house you can afford. That monthly payment is likely to be the biggest part of your cost of living.
Using NerdWallet’s mortgage calculator lets you estimate your mortgage payment when you buy a home or refinance. You can change loan details in the calculator to run scenarios. The calculator can help you decide:
The home loan term length that’s right for you.30-year fixed-rate mortgagelower your monthly payment, but you’ll pay more interest over the life of the loan. A15-year fixed-rate mortgagereduce the total interest you'll pay, but your monthly payment will be higher. c
If an ARM is a good option.Adjustable-rate mortgagesstart with a "teaser" interest rate, and then the loan rate changes — higher or lower — over time. A5/1 ARMcan be a good choice, particularly if you plan on being in a home for just a few years. You’ll want to be aware of how much your monthly mortgage payment can change when the introductory rate expires, especially if interest rates are trending higher.
If you’re buying too much home.The mortgage payment calculator can give you a reality check on how much you can expect to pay each month, especially when considering all the costs, including taxes, insurance and private mortgage insurance.
If you’re putting enough money down.With minimum down payments commonly as low as 3%, it's easier than ever to put just a little money down. The mortgage payment calculator can help you decide what the best down payment may be for you.
How lenders decide how much you can afford to borrow
Mortgage lenders are required to assess your ability to repay the amount you want to borrow. A lot of factors go into that assessment, and the main one is debt-to-income ratio.
Yourdebt-to-income ratiois the percentage of pretax income that goes toward monthly debt payments, including the mortgage, car payments, student loans, minimum credit card payments and child support. Lenders look most favorably on debt-to-income ratios of 36% or less — or a maximum of $1,800 a month on an income of $5,000 a month before taxes.
» MORE:Calculate your debt-to-income ratio
Typical costs included in a mortgage payment
If your mortgage payment included just principal and interest, you could use a bare-bones mortgage calculator. But most mortgage payments include other charges as well. Here are the key components of the monthly mortgage payment:
Principal:This is the amount you borrow. Each mortgage payment reduces the principal you owe.
Interest:What the lender charges you to lend you the money. Interest rates are expressed as an annual percentage.
Property taxes:The annual tax assessed by a government authority on your home and land. You pay about one-twelfth of your annual tax bill with each mortgage payment, and the servicer saves them in anescrow account. When the taxes are due, the loan servicer pays them.
Homeowners insurance:Your policy covers damage and financial losses from fire, storms, theft, a tree falling on your house and other bad things. As with property taxes, you pay roughly one-twelfth of your annual premium each month, and the servicer pays the bill when it's due.
Mortgage insurance:If your down payment is less than 20% of the home’s purchase price, you’ll likely paymortgage insurance. It protects the lender’s interest in case a borrower defaults on a mortgage. Once the equity in your property increases to 20%, the mortgage insurance is canceled, unless you have anFHA loanbacked by the Federal Housing Administration.
Typically, when you belong to a homeowners association, the dues are billed directly, and it's not added to the monthly mortgage payment. Because HOA dues can be easy to forget, they're included in NerdWallet's mortgage calculator.
Reducing monthly mortgage payments
The mortgage calculator lets you test scenarios to see how you can reduce the monthly payments:
Extend the term(the number of years it will take to pay off the loan).With a longer term, your payment will be lower but you’ll pay more interest over the years. Reviewyour amortization scheduleto see the impact of extending your loan.
Buy less house.Taking out a smaller loan means a smaller monthly mortgage payment.
Avoid paying PMI.With a down payment of 20% or more, you won’t have to pay private mortgage insurance. Similarly, keeping at least 20% equity in the home lets youavoid PMIwhen you refinance.
Get a lower interest rate.Making a larger down payment can not only let you avoid PMI, but reduceyour interest rate, too. That means a lower monthly mortgage payment.
Monthly mortgage payments can go up
Your monthly payment can go up over time if:
Property taxes or homeowners insurance premiums rise. These costs are included in most mortgage payments.
You incur a late payment fee from your mortgage loan servicer.
You have an adjustable-rate mortgage and the rate rises at the adjustment period.
I am an expert in the topic of calculating mortgage payments. I have a deep understanding of the concepts and calculations involved in this process. To demonstrate my expertise, I will provide information related to all the concepts mentioned in the article you provided.
Home Price and Down Payment
When calculating a mortgage payment, you need to consider the home price and the down payment. The home price is the amount you pay for the property if you're buying or the current value if you're refinancing. The down payment is the cash you pay upfront for a home if you're buying or the amount of equity you have if you're refinancing. Home equity is the value of the home minus what you owe .
Interest Rate and Loan Term
The interest rate and loan term are crucial factors in calculating a mortgage payment. The interest rate is the cost of borrowing money and is usually expressed as an annual percentage. To calculate the monthly interest rate, you need to divide the annual rate by 12. The loan term refers to the length of the mortgage in years. For example, a 30-year fixed-rate mortgage has a loan term of 30 years or 360 payments.
Property Taxes, Homeowners Insurance, and HOA Fees
In addition to the principal and interest, a mortgage payment may include other costs such as property taxes, homeowners insurance, and homeowners association (HOA) fees. Property taxes are annual taxes assessed by the government on your home and land. Homeowners insurance covers damage and financial losses from various events. HOA fees are dues paid to a homeowners association for the maintenance of shared amenities. You can enter your own figures for these costs if you don't wish to use estimates provided by calculators .
Mortgage Payment Calculation Formula
The formula for calculating a mortgage payment is as follows:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
- M is the monthly mortgage payment
- P is the principal amount (the amount you borrow)
- i is the monthly interest rate (annual interest rate divided by 12)
- n is the number of payments over the life of the loan (loan term in years multiplied by 12).
How a Mortgage Calculator Helps
A mortgage calculator is a useful tool for estimating your mortgage payment when buying a home or refinancing. It allows you to change loan details and run different scenarios. You can use a mortgage calculator to determine the home loan term length that's right for you, compare different loan types, and assess whether an adjustable-rate mortgage (ARM) is a good option for your situation. It can also help you determine if you're buying too much home and if you're putting enough money down.
How Lenders Assess Borrowing Ability
Mortgage lenders assess your ability to repay the amount you want to borrow by considering various factors, with the main one being the debt-to-income ratio. This ratio is the percentage of your pretax income that goes toward monthly debt payments, including the mortgage, car payments, student loans, credit card payments, and child support. Lenders generally prefer debt-to-income ratios of 36% or less. They also consider other factors such as credit history and employment stability.
Typical Costs Included in a Mortgage Payment
A mortgage payment typically includes more than just the principal and interest. It also includes other charges such as property taxes, homeowners insurance, and mortgage insurance. Property taxes and homeowners insurance are usually paid monthly, with a portion of the annual amount included in each payment. Mortgage insurance is required if your down payment is less than 20% of the home's purchase price. Once your equity reaches 20%, the mortgage insurance is usually canceled.
Reducing Monthly Mortgage Payments
If you want to reduce your monthly mortgage payments, there are several strategies you can consider:
- Extend the term of the loan: A longer loan term will lower your monthly payment, but you'll pay more interest over the years.
- Buy a less expensive home: Taking out a smaller loan means a smaller monthly mortgage payment.
- Avoid private mortgage insurance (PMI): With a down payment of 20% or more, you can avoid paying PMI.
- Get a lower interest rate: Making a larger down payment can help you secure a lower interest rate, resulting in a lower monthly payment.
I hope this information helps you understand how to calculate a mortgage payment and the factors involved in the process. If you have any further questions, feel free to ask!
