The average mortgage payment is often one of your biggest expenses, consuming more than 30% of your monthly household income depending on your debt to income ratio. And that payment will most likely persist for 15 or 30 years. So, it makes sense to know the amount of your mortgage payment before you sign loan documents.
The mortgage payment depends on several variables, which may change over the life of your loan. But you can easily learn how to calculate your mortgage payment. Follow these steps:
Determine Your Loan Balance
Your loan balance is the amount you are borrowing to pay for your house. Use the outstanding loan balance when calculating the principal-and-interest portion of your mortgage payment.
You may think this number is simply the home purchase price minus your down payment. But the loan balance may include closing costs that are capitalized, which means they are added to the principal and paid over the life of the mortgage.
Calculate Principal and Interest on Your Mortgage Loan
When calculating mortgage payments, generally the biggest elements are principal and interest (P&I). For a fixed-rate mortgage (FRM), the combined numbers should be the same each month for the life of the loan. For an adjustable-rate mortgage (ARM), mortgage payments will change over time as the interest rate is adjusted or reset.
Calculating the P&I component of a fixed-rate loan is relatively straightforward with a mortgage payment calculator. For example, plug in your numbers (such as your loan balance, interest rate, and loan term) and find out the monthly amount of principal and interest using mortgage payment calculators on this website or at realtor.com , Bankrate, and Bloomberg.
You can also use a spreadsheet (such as Microsoft Excel or Google Drive) and its financial functions to calculate the P&I component. Create a mortgage payment formula using the “PMT” (payment) function. Enter your information in response to these prompts:
- Rate: interest rate expressed either as a percentage or number; remember to divide the annual interest rate by the number of months in the year (12)
- NPER: number of periods (generally, the number of months) in the loan contract
- PV: present value of the mortgage loan, which is the beginning loan balance
- FV: future value of the mortgage loan, which should be $0 for fully amortizing loans
- Type: leave this field blank OR enter “0” if the first payment will be made at the end of the loan period or “1” if the payment will be made at the beginning of the loan period (note that most online payment calculators use “0” as the default setting)
For example, calculate the mortgage payment on a 30-year fixed rate loan with a balance of $200,000 and a rate of 5.5% by creating this formula: =-PMT (.055/12, 30*12, 200000, 0, 0) which returns $1,135.58.
To determine your mortgage payment on a fully amortizing adjustable rate loan, think of the ARM as a series of fixed-rate loans, each with a different interest rate, number of periods, and present values (or beginning loan balances). When you first get your loan, calculate the principal and interest portion of your payment based on the opening interest rate. When the interest rate resets, calculate the new P&I using the new rate, the remaining period of the loan, and the remaining balance on the loan.
Add Taxes, Insurance, and More
Depending on your loan contract, your mortgage payment will cover taxes, insurance, and fees.
Lenders generally require you to pay a monthly portion of your annual property taxes and homeowner’s insurance with your mortgage payment. These amounts are held in escrow. When the bills are due, the lender or loan servicer pays the taxing municipality and insurance company.
Private mortgage insurance (PMI) and mortgage insurance for government-backed mortgages are often included in the mortgage payment. You may be required to carry insurance when the balance of your loan is more than 80% of the property’s value; however, this insurance can typically be removed when you have paid down the loan balance.
Finally, you may owe fees for your mortgage. These include late fees, returned check fees, and charges to monitor properties with mortgage loans at risk of default.