It is very important for effective financial planning to know how much you have to pay on your mortgage each month. This is true whether you’re a first-time homebuyer or refinancing, but it seems especially so for that first time when the exact amount and the process by which it was arrived at can feel like a bit of a surprise (a pleasant one if you dreamed and hoped to have what you have). Either way, the following will attempt to guide you through the steps necessary to arrive at your monthly mortgage repayment amount.
Key Components of Your Mortgage Repayment
To figure out how much you will pay back on your mortgage each month, several different and critical components must be taken into account:
Total Amount
This is the total you borrow from the lender to buy your home. Obviously, the bigger the amount, the bigger—not to say heftier—the monthly payments.
Interest Rate
This is the price a lender charges for the use of its money. Generally speaking, a higher interest rate produces a bigger and heftier monthly payment.
Term
This refers to the length of time you have to repay the loan, which on the typical American home might be anywhere from 15 to 30 years. Obviously, the longer the term, the lower the monthly payments. But HELLO! the heavier the interest baggage you’ll be carrying by the end of the concert.
Repayment Structures
There are several potential repayment structures:
Principal and Interest
Each month, you make a payment that includes both types of sums: what we call the “principal” amount, which is actually the “not yet paid” part of a loan that you’ve had for a year, two years, etc. (we’ll discuss this “pay as you go” structure); and the “interest” amount, which serves as a fee for borrowing the money, essentially like a rental charge for the use of the funds.
Additional Costs
By the way, there are serious consequences if you don’t make these monthly payments. Additional payments may involve your local government charging you property taxes based on the value of your property and homeowner’s insurance. Your lender will probably require this, as it covers just about any sort of disaster that could befall your house — fire, tornado, earthquake, or a “flood zone” in which your house is located. They expect you to make these payments, not only because they wish you to have that much peace of mind, but also because the absence of such payments can lead to a payment default, with your house quite literally being the collateral for your loan.
Mortgage Payment Formula
The typical mortgage payment equation is:
\[ M = P \times \dfrac{r(1 + r)^n}{(1 + r)^n – 1} \]
In this case:
- M stands for the monthly payment coming due
- P is the amount being borrowed (the principal)
- r is the monthly interest rate (the annual interest rate divided by 12)
- n is the number of months in the term (the number of years in the term multiplied by 12)
For instance, if you take a mortgage for $300,000 over 30 years at 4% interest, your monthly payment will be approximately $1,432. That’s using the formula straight up. You could do it in reverse—subtract where it says “approximately” at the end of the first sentence and add in the second line and it would come out the same.
Using Online Mortgage Calculators
If maths isn’t your thing, and you want a simpler route to your solution, going with an online mortgage calculator can be a speedier and more user-friendly process. Most online financial websites have these handy tools, and all they really ask for is a few key figures: the size of your mortgage, the interest rate, and the term. Then they give you a read on what your monthly payment could amount to. But remember, “monthly payment” can be a slippery term. It could also append to “in combination with,” tag on to “your property taxes,” and include “your homeowners insurance,” given that you have a house and have insured it. Pay attention to the details.
Impact of Fixed vs. Variable Rates
The choice of rate structure will have a direct effect on how much you will repay each month:
Fixed-Rate Mortgage
With a fixed-rate mortgage, I can say with certainty that your payments will remain constant throughout the term. The rate is set and does not change, which is very straightforward and easy to manage. You don’t have to take a market condition into account when estimating your future payments. You just know they will be the same, month in and month out.
Repayment Schedule
A repayment schedule is a view of the future. It shows you your required payments for a set period and lets you see how much of your payment is going toward interest and how much is going toward paying down the principal. But there are costs associated with a mortgage that aren’t always upfront or easy to see. For example, many people think of a fixed-rate mortgage as being stable. In a way, it is! But your payment isn’t set in stone—it increases over the years in a way that’s very Uncle Sam-friendly, thanks to something called the mortgage interest deduction. When you draw the full picture of how much this tax strategy saves you, you’re really just reducing your overall cost of the principal.
Tips for Managing Your Mortgage Repayment
- Make Extra Payments
Make extra payments toward your mortgage if you can. Even small additional payments can shorten the term of your loan and lessen the total interest that you pay.
- Budget Wisely
Be sure that your mortgage payment fits well within your monthly budget. Track your expenses closely, and adjust what you can to keep your budget on course.
- Consider Refinancing
If interest rates drop significantly, consider refinancing your mortgage. This step can lower your payment amount, but watch out for any associated fees that could nullify the savings you gain.
- Avoid Late Payments
Finally, never pay your mortgage late. Use automatic payments if necessary to avoid this pitfall.
Final Thoughts
When it comes to determining your monthly mortgage payment, there are a number of components to understand first. These include the principal (the actual loan amount), the interest (the cost of borrowing the money), and a few other possible “extras” (such as homeowners insurance and property taxes). The “standard” mortgage formula allows you to insert all of these numbers and comes out with a number at the end—your monthly payment (or close to it; many people use online calculators, which are also based on the formula). If you truly want to know the ins and outs of your mortgage repayment, and the potential ramifications for your financial future, you should probably consult a mortgage advisor or a trusted accountant.
