What is a Mortgage Payment, and How is it Calculated?
Is the mortgage payment troubling you? Do you want to know how you can pay off your loan with ease and convenience? The question about “How do you calculate mortgage payments?” lingers in your mind. If yes, then you’re on the right page. This blog will reflect on all the ways you can manage and pay off loans and mortgage payments.
Types of Mortgages:
Let’s start with an essential brief of the two types of mortgages:
A fixed-rate mortgage provides the borrower with a specific fixed value of the interest rate over a set of the term, typically 10, 15, or 30 years, depending on the amount. As a result, the borrower can count on their monthly payments being the same every month.
Adjustable-rate mortgages mean that the interest rate is not fixed and can – and usually, do –change over the life of the loan. Factors like inflation and an increase in market rates cause the interest rate to fluctuate.
How Do You Calculate Mortgage Payment?
Let’s drive ourselves back to the motto: how to pay the amount smartly. Mortgage payment consist of four main parts:
Your principal refers to the total amount of the loan borrowed. It’s the money that you pay towards what you owe the bank for the loan. The principal goes towards gradually paying down the balance that you owe. When you first purchase a property, part of the mortgage payment that goes towards the principal is relatively tiny. However, throughout the loan, the due balance shrinks, and as long as you have the fixed-rate mortgage, your monthly payment is the same each year.
Nobody lends something unless they get something in return. In this case, banks will provide mortgages only if you pay back extra of that mortgage in the form of interest. This interest is a percentage of the money loaned to you. This additional percentage is the amount the bank charges to borrow money. The interest is fixed and adjustable for fixed-rate mortgages and adjustable mortgages, respectively.
When you buy a home, you’ll also be required to pay taxes, and these vary based on where you live, how much you borrow, and more. Part of each payment goes to paying these taxes, but it works a little differently. Though taxes are annual, your lender can estimate them, divide them up into 12 payments, and add them to your mortgage. Then, the amount you pay for taxes with each payment gets held in an escrow account until the taxes are due. Again, taxes are calculated based on the home.
The mortgage also includes homeowner’s insurance, which lenders need to cover the damage to the home, which is also the collateral and the property inside it. In addition to homeowner’s insurance, your mortgage payment may also include private mortgage insurance, or PMI, which is an insurance policy you pay to protect your lender should you default.
So, how do you calculate mortgage payment? Let’s break it into manageable steps:
- Determining the mortgage principal
- Calculating monthly interest rates
- Calculating the number of payments
- Finding out whether private mortgage insurance is needed
- Considering the cost of homeowner’s taxes
- Considering the amount of homeowner’s insurance
- You can also work part-time/full-time jobs to pay off your mortgage loans.
Calculating by Hand
Your monthly payment can also be calculated by hand with the help of this formula:
M = P [i (1 + i)^n ] / [ ( 1 + i )^n-1 ]
P stands for a personal loan amount
I stands for monthly interest rates
n stands for the number of months required to repay the loan
(Taxes and insurance rates are excluded in this equation)
Calculating Mortgage Payment Through an Online Calculator
If doing math doesn’t float your boat, try using online mortgage calculators, including insurance costs and tax rates. These calculators vary with varying characteristics, but they can turn up with pretty accurate estimations for your mortgage payment. They can also help in estimating taxes and insurance costs.
So, this was all we could tell you about the calculation process. If you want to surpass all the hassle you need RateChecker to calculate it for you.