The Guide to Calculating Mortgage Payments
Calculating your monthly mortgage payment can help you determine how much house you can afford. In our complete guide to calculating mortgage payments, we’ll explain the different factors contributing to your monthly payment, how to calculate it, and ways to lower it.
What's included in your mortgage payment
Most mortgage payments have four main components: principal, interest, taxes, and insurance. These factors, sometimes called PITI, contribute to your monthly bill, and understanding them will help you know what you need to consider when shopping for a home. We’ll review each one below.
The principal is the amount you’re borrowing from the lender. You can calculate your loan’s principal by subtracting your down payment amount from the total cost of the house.
For example, if you put $50,000 down on a $400,000 home, your loan’s principal will be $350,000.
Interest is the amount of money you’re paying the lender to borrow the money. The amount of interest you’ll owe depends on your interest rate, represented by an annual percentage rate or APR. Divide your APR by 12 to calculate the percentage of interest you’ll pay monthly.
No matter where you buy a home, you’ll pay property taxes. Your home’s property or real estate taxes are paid annually. Most mortgage lenders pay these taxes on your behalf from an escrow account, a dedicated account to pay property-related expenses. Divide the property tax amount by 12 to understand what you’ll pay each month.
Your taxes are assessed each year and can change. If your lender pays your taxes and they increase, you may have an escrow shortage, which can inflate your monthly mortgage payment. If taxes decrease, your mortgage bill may decrease but that depends on the other costs your escrow account pays for, like insurance, which we’ll cover next.
There are two different types of insurance that your mortgage may include:
Every home loan requires homeowner’s insurance. This coverage protects you, your lender, and your home in the event of damage from storms, fire, falling trees, and other situations. Your insurance policy covers the costs of repairs due to damage from these events, preserving your home’s value and the lender’s investment.
Homeowners who live in high-risk areas for floods, fires, and other natural disasters may require additional coverage or policies, depending on the lender.
Like property taxes, many lenders pay for this cost monthly from your escrow account. Your insurance premium is billed on an annual basis, and it can fluctuate year to year, which can impact your monthly mortgage payment. Divide your yearly premium by 12 to determine the monthly cost.
Private mortgage insurance
Most lenders require private mortgage insurance (PMI) if a borrower makes a down payment of less than 20% of a home's purchase price. PMI protects the lender, lowering their risk so you can get a loan you might not otherwise qualify for.
With conventional loans, your PMI may be canceled automatically or by request when your home’s loan-to-value ratio falls below 80% of its appraised value. Your lender will list your PMI termination date in your closing documents, but it can be initiated sooner if your home’s value increases.
How to calculate your mortgage payment
With all the factors contributing to your mortgage, a mortgage calculator is the easiest and most accurate way to calculate your monthly payment amount.
At FirstCapital Bank of Texas, all our loan calculators are free and easy to use, helping you make confident financial decisions that fit your budget. Use our mortgage calculator to quickly determine your monthly mortgage payment and amortization schedule, which is how your payment is applied toward principal and interest.
If you’re currently renting or thinking about buying your first home, our Rent or Buy Calculator can compare the costs of each with reports to help you visualize short- and long-term financial benefits.
Ways to lower your monthly mortgage payment
Since your monthly mortgage bill depends on several factors, you can play with the variables to reduce your monthly payment. Lower your monthly mortgage payment by:
- Buying a cheaper home
- Choosing a longer loan term
- Finding a lower interest rate
- Putting more money down
- Looking for a home with lower property taxes
- Shopping for lower insurance premiums
At FirstCapital Bank of Texas, our home buying experts can evaluate your financial situation to determine what type of home you can afford. They’ll identify a target price range for your next home based on your budget, down payment, interest rate, and loan term.
Not ready to buy a home just yet? See how you can start saving for a home with 5 simple steps.