Are you a first time home buyer? Well, it’s a good thing you’re reading this post! I’m sharing the important information you must know in order to use a mortgage payment calculator the right way (and not get duped).
If you want a completely accurate idea of what you can afford, you should set an appointment with a mortgage lender. But, there are a few good reasons why a mortgage payment calculator could benefit you in the meantime:
- You’re working on getting a down payment ready, and aren’t quite there yet. (A mortgage payment calculator can help you determine the right number to work towards. You can learn helpful tips for financial goal setting & saving money, here).
- You need to improve your credit. (Here are two great resources to help you improve your credit, fast: Exciting Changes in Credit Scoring & How I Upped my Credit Score 100 Points.)
- Your work history is sparse or you just started a new job. (There’s no point meeting with a lender if you don’t have 12 months of consistent work history).
- You just want to test the waters in a new area or in a changing housing market.
By the end of this post, you’ll fully understand the key components of a mortgage payment, how to pick a good mortgage payment calculator (so you don’t get duped), how to get the most accurate mortgage payment estimates, and other helpful tips that can save you money and ensure that you are really financially prepared for buying a home.
The Key Components of a Mortgage Payment
If you’re looking to start the home buying process soon, you’re probably exploring your pricing options and trying to figure out what you can afford. If used correctly, mortgage payment calculators can be a great resource. But if not, you might end up confused or disappointed.
Let me tell you; there are many Mortgage Payment Calculators out there and they are not all created equally! I’ve used calculators in the past that ended up giving me false hope of what we could afford which is super disheartening. Don’t worry, I’m going to explain exactly how to avoid that situation!
Why a Mortgage Payment Calculator Might be Misleading.
Some mortgage payment calculators exist on the web to suck you in to using specific loan programs. Because of that, they want to entice you to learn more by throwing out a super low number.
You might see that great, low mortgage payment estimate they provide and decided to give them your email address or phone number to learn more. If you do, you’ll likely find that their calculators were omitting costly aspects of a mortgage payment that have to be considered.
Typically, they will leave out Property Taxes, HOA fees and Mortgage Insurance Premiums. I’ll explain what each of these are below.
It’s a pretty sneaky tactic that bugs the heck out of me. But, now that I know what to look for in a true estimate, I can avoid getting false information.
The True Key Components of a Mortgage Payment
- Principle & Interest
- Home Insurance & Property Taxes
- Mortgage Insurance Premium
- HOA Fees
Principle & Interest
Your principle and interest should be the main bulk of your mortgage payment. This is the amount that some sneaky companies throw at you to try to get your business, knowing full well there are several other components to consider.
“The principal and interest payment on a mortgage is probably the main component of your monthly mortgage payment. The principal is the amount you borrowed and have to pay back, and interest is what the lender charges for lending you the money.”Consumer Financial Protection Bureau
Home Insurance & Property Taxes
Home insurance works like most any other type of insurance. You’re required to have it so the lender is protected against any losses (and so are you!). Property taxes are another expense to add on and can vary wildly by state. I’ll show you where to find good property tax estimates per state below.
“For most borrowers, the total monthly payment you send to your mortgage company includes other things, such as homeowners insurance and taxes that may be held in an escrow account. If you have an escrow account, you pay a set amount with every mortgage payment for these expenses. Your mortgage company typically holds the money in the escrow account until those insurance and tax bills are due, and then pays them on your behalf.”Consumer Financial Protection Bureau
Mortgage Insurance Premium
If your down payment is 20% or more, you don’t need to worry about this. Mortgage insurance is an added expense lenders charge to lower their risk to borrowers that have a lower down payment. The cost of this can vary depending on what type of loan you have, the amount of your down payment and your credit score. It’s possible to get rid of mortgage insurance with refinancing in the future.
” If you get a conventional loan your lender may arrange for mortgage insurance with a private company. Private Mortgage Insurance (PMI) rates vary by down payment amount and credit score but are generally cheaper than FHA rates for borrowers with good credit. Most private mortgage insurance is paid monthly, with little or no initial payment required at closing. Under certain circumstances, you can cancel your PMI.Consumer Financial Protection Bureau
If you get a Federal Housing Administration (FHA) Loan, your mortgage insurance premiums are paid to the Federal Housing Administration (FHA). FHA mortgage insurance is required for all FHA loans. It costs the same no matter your credit score, with only a slight increase in price for down payments less than five percent. FHA mortgage insurance includes both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.”
I don’t think anyone is a fan of these, or HOA’s in general. Most of the time, I can’t see how the services provided, merit the fees required. However, sometimes, they are to cover access to awesome things like a clubhouse and pool or playgrounds.
More often than not, though, they are for super lame, but, necessary things like snow removal, water, sewage, etc.
These fees are determined by the community, subdivision or housing development you live in and are generally paid to a 3rd party, not your lender. So, while they aren’t actually lumped in with your main mortgage payment, it’s another regular fee that you have to consider.
The best way to avoid these, is to tell your real estate agent that you want a home without an HOA fee. You’ll likely have to purchase a single family home that’s not in a development.
How to pick a good Mortgage Payment Calculator
A good mortgage payment calculator will allow you to be specific to your region, include principle & interest, home insurance, property taxes, and have a spot to enter HOA fees or other fees and expenses such as a mortgage insurance premium (if needed). Here are some of the best mortgage payment calculators I’ve come across as well as resources to help you estimate your property taxes and insurance costs by state.
For FHA Loans
For Conventional Loans
How to get the most accurate mortgage payment calculator estimates.
Be sure to include all of the true key components of a mortgage payment listed above, try to be as specific to your location as possible, adjust general settings and percentages to the specific numbers you’ve researched for your area and add the final two expenses below.
Other Costs to Consider:
- Home Maintenance
Monthly utilities and regular home maintenance are regular expenses that are often overlooked when determining whether or not you can afford to purchase a home. You should make sure whatever estimate you calculate includes these two big ticket items. If you don’t, you run the risk of ruining your budget, digging into savings, or worst of all, determining that you ultimately can’t afford the home you bought.
Research Your Area
When figuring in utility costs, be sure to research the area in which you plan to buy and find out what the average utility bill is. The more specific you are able to be, the better.
It’s more difficult to determine what your home maintenance costs will be, but it’s safe to put away about $75 a month, for a total buffer of $900/yr. (That’s how much it cost to replace our water heater when it busted in our first home).
Other One-Time Costs to Consider
- Closing Costs (Smart Asset has a calculator you can use by location and loan type)
- Home Inspection
- Moving Costs
These costs won’t be a monthly occurrence, but are things that will come up in the home buying process that you need to anticipate financially. If you’ve worked hard saving up for a down payment, don’t stop there! You’ll need a little more to cover all the expenses of your home purchase and move. (If you have a good real estate agent, you might be able to get out of those closing costs, though).
Tips that Can Save you Money
When you buy matters!
The housing market has seasonal ups and downs. Understanding this behavior can save you big money on your home loan and beyond. You can read more about how to reduce your loan costs and how to save on future costs, here.
Once you’ve purchased your home, you’ll want to protect your investment with proper upkeep. I’ve listed 25+ home repair and upkeep items to stay on top of in this post, that will save you money year round!
Mortgage payment calculator estimates are valuable to the extent that they can help you determine your home buying readiness and give you an idea of the type of home you can afford in your area. For the most accurate information, you should meet with a good mortgage lender.
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