Breaking Down Your Monthly Mortgage Payment
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Mortgage Amount
If you’re buying a home, you’ll want to put in the price of the homes you’re looking at and subtract your down payment. If you’re far enough along, you may be able to also add any costs being built into the balance. For a refinancing, include the expected balance after you close.
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Interest Rate
While it’s largely dependent on market factors outside of your control, your interest rate has a huge impact on what your monthly mortgage payments will be. Remember, the majority of your mortgage payments at first will go toward paying interest. When calculating your payment amount, you’ll want to look at the base rate and not the annual percentage rate (APR). You use the lower base mortgage rate because your monthly payment doesn’t reflect closing costs. Knowing APR is still useful, but the context of the overall cost of the loan as opposed to monthly expenses is key.
Mortgage Period
This is how long you have to pay the loan off. Longer terms, like a 30-year mortgage, mean smaller payments, but more interest paid. Shorter terms, like a 15-year mortgage, have the opposite properties – larger payments, less interest paid.
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Mortgage Insurance
If you make a down payment of less than 20%, you’ll have to pay private mortgage insurance (PMI) on a conventional loan. This payment is based on a percentage of the loan amount and protects the lender in case you default. The rate is based on down payment or equity amount and credit score as well as loan type and occupancy. You can request removal on a one-unit primary residence once you reach 20% equity in most cases.
Certain government-backed options like Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and those from the U.S. Department of Agriculture (USDA) have mandatory upfront and annual mortgage insurance or guarantee fee payments that may last for the life of the loan – depending on the loan type and down payment amount or existing equity. Depending on your down payment amount, mortgage insurance premiums may be built into the calculations.
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Property Taxes
Since property taxes are often built into your mortgage payment, having a fairly accurate estimate will help you get a better picture of cost. Regardless of whether you have an escrow account, these need to be accounted for as a cost of ownership.
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Homeowners Insurance
Mortgage lenders will require you to carry homeowners insurance to protect their investment. If you have an escrow account, the overall premium is split into monthly payments. Even if you don’t, you still need to include this as a homeownership expense.
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Homeowners Association (HOA) Fees
These aren’t typically included in your monthly mortgage, even if you have an escrow account. However, it’s important to factor in these monthly and annual fees. The HOA fees also impact what you can qualify for when you’re looking to purchase or refinance a home.