What goes into a mortgage payment

When we first started looking at homes, we had to do a bit of research to make sure we knew what we’d be ultimately paying per month. We had already been pre-approved by the bank for a certain amount, but we wanted to make sure we could afford it. We were thankful we did. When they ran the numbers, we were told we could borrow $100,000 more than what we were comfortable with when we broke it down monthly. Keeping with our original budget, we were able to put that extra amount towards paying down our other loans each month.

For a quick glance look at a potential home we were interested in, we used the Zillow Mortgage Calculator (with the advanced settings). But to help understand the numbers a bit more, we included examples of what all typically goes into a monthly payment. You can use these links to jump to the next section:

Loan amount (the “principle”)

Explanation: This is pretty self-explanatory. The loan amount is the total amount of money you’re borrowing on the home. Month-to-month, you’ll also see this listed as the principle. In the beginning, more of your monthly payment will go toward interest and not the principle. But as the years go by, you’ll see a larger amount is applied against the principle and a smaller amount towards interest.

“E.g.”: If the total sale amount of the house is $300,000 and your down payment is 10% or $30,000, then the loan amount would be $270,000. During a specific month, if your total P&I (principle and interest) is $1,408 and $400 goes to interest, that means you’re paying $1,008 against the principle.

Down payment

Explanation: The down payment is the amount you can immediately pay against the house. Traditionally, people aim to put 20% down so they can avoid paying a PMI (private mortgage insurance). Depending on the type of loan though, financial institutions will allow you to put down less than the traditional 20%. A conventional FHA loan can typically go as low as 3.5% down, while those who are eligible for a USDA loan may not need a down payment at all to qualify.

Additional information: The down payment does not include closing costs. Closing costs can include fees and escrow, an account the lender holds with property taxes and home insurance funds for the future (can be about a year’s worth.) Closing costs will also factor in any earnest money you may have already put down. Closing costs will need to be factored separately and can be an additional 4% of the home price to be paid at closing.

“E.g.”: If the total sale amount is $300,000 and you want to put 10% down, your down payment would be $30,000. If you put 20% down, the down payment would be $60,000.

Loan duration

Explanation: Although this isn’t a direct cost added to the monthly mortgage, it does affect what the loan payment each month will look like. Plain and simple, this is how long you’re financing the mortgage for and what percent in interest you will be paying. Traditional mortgage terms are 15 years or 30 years, but others such as 10 years are available.

You can also finance with a fixed interest rate throughout, or you can apply for a loan with a fixed rate for a certain number of years that varies annually after that.

Overall, short term loans will have a higher payment per month but you will pay less interest over the course of the loan (both because you are paying the principle down faster and shorter term loans tend to have lower interest rates overall). A long term loan will be cheaper per month, but you could end up paying up to twice as much or more in interest over the course of the loan.

Additional insight: If you’re buying for the long term and the interest rate is low, a fixed rate is likely better for you. If you’re planning to resell the home within a few years after buying, an adjustable rate might be worth considering as it usually has a lower initial interest rate.

Also, some lenders allow you to pay off your loan early. If you can, consider bi-monthly payments or paying a little more per month. But be weary: some lenders charge a prepayment penalty if you pay it off sooner. Just be sure to ask your lender about it.

Types of loans: The standard duration is 15 and 30, but some financial institutions allow 10, 20, 25, or 40 year terms. The most common financing options we found were 15-year fixed, 30-year fixed, 10/1 ARM (adjustable-rate mortgage), 7/1 ARM, 5/1 ARM, and 3/1 ARM.

“E.g.”: If your total sale price is $300,000 & down payment is $30,000, a 30-year fixed could run around $1,400 per month. By those same standards, a 15-year fixed would be around $2,000 and a 5/1 ARM would be about $1,300. Look for the best option for your situation.

Interest rate

Explanation: Interest is how much a financial institution charges you for borrowing money. This is a percentage added on to the total loan and is charged at the beginning of the pay period (typically each month). Before you lock a rate in, it can change day-to-day and can be potentially higher if your credit score is lower than average.

Additional insight: Interest rates are lower if 1) the pay period is shorter, 2) you choose an adjustable-rate mortgage, and/or 3) if you have a high credit score.

“E.g.”: In December 2013, the averages were 4.4% for a 30-year fixed, 3.37% for a 15-year fixed, and 2.93% for a 5/1 ARM. As of December 2018, the averages were 4.75% for a 30-year fixed, 4.25% for a 15-year fixed, and 4.0% for a 5/1 ARM.

PMI (Private mortgage insurance)

Explanation: For most types of home loans, the private mortgage insurance is charged until 20% of the loan is paid off. This is the lender’s way of insuring themselves in case a home is defaulted on. The higher the down payment, the less PMI per month you typically pay. But in most cases if a down payment of 20%+ is made at the start of the loan, no monthly PMI rate will be charged.

Additional insight: Some loans require PMI to be charged throughout the life of the loan.

“E.g.”: If the sales price of your home is $300,000, your down payment is $30,000 (10%), and your PMI rate is .75% (or 3/4 of a percent), you will pay an extra $168.75 per monthly payment or $2,025 per year.

Tax rate (Property tax)

Explanation: Your property tax is what your local & state government collect based on the area you live in. It is a percentage of the total appraised value of your home. This tax money may go towards schools in your district, roads, public infrastructure (such as parks and libraries), the police and fire departments, emergency medical services (EMS), MUD (municipal utility district), etc.

Additional insight: Property tax is charged once per year, but can be included in your mortgage payment so that it is set aside each month (also known as an “escrow”). Once you pay off the loan, you will have to start paying the taxes directly to the government once per year.

Some states offer discounts on taxes, for things such as first time homebuyers, if your home is your primary residence (“homestead” discount), etc. Check your local tax laws for possible savings there.

You may also be able to petition the yearly appraised value of your home. The upside if the yearly appraised value goes down (e.g. $350,000 to $320,000) is that you’ll pay less in taxes for it. But if your state makes property tax available to the public and you’re actively trying to sell, it may affect what people are willing to pay for your house.

Pay close attention to what your property taxes include. In some cases, if there’s not a fire department in the area, you may be charged extra for their services since you’re not in their jurisdiction.

“E.g.”: If the appraised value of your home is $300,000 and your tax rate is 2.00%, then you will pay $6,000 in property taxes per year (or about $500 per month.) A 20% homestead discount would drop the yearly total to $4,800 (or about $400 per month.)

If the appraised value of your home is $350,000 and your tax rate is 2.00%, then you will pay $7,000 in property taxes per year (or about $583 per month.) A 20% homestead discount would drop the yearly total to $5,600 (or about $467 per month.)

Insurance

Explanation: Insurance premiums vary based on the insurance company, state, amount of coverage, and discounts you qualify for. But if you don’t know all of that information yet, you can start with .5% or half of a percent of the total appraised value of the home (which is determined annually) to get a general idea. On top of that, there’s usually a 1-2% deductible for any files claimed. Your policy may not include flood or fire insurance either, so be sure to find a policy that fits your situation best (flood insurance near the coast, etc.)

Additional insight: Some factors that may lower your premium are if your house is newly built, if you have a security system, if you bundle it with your car insurance, and if you pay the premium all at once at the beginning of the policy year instead of month-to-month.

“E.g.”: If you paid $300,000 for your home and it’s appraised for that, your insurance at 0.5% would be $1,500 total for the year (or $125 per month.) If you paid $300,000 for your home, but it’s appraised at $350,000, your insurance at 0.5% would be $1,750 total for the year (or $146 per month.)

HOA fees (Homeowners association fees)

The explanation: Depending on the type of community you live in, you may have to pay homeowners association fees per month. These fees go towards community amenities such as a upkeep of pools, parks, clubhouses, the grounds, lighting, etc. In cases where the county doesn’t maintain the roads, it may go towards that too.

Your HOA fees can vary drastically depending on where you live. Some places are under $30 a month if it only goes towards features such as street lights. Other places can be $500+ per month. Your real estate agent should be able to help you find out the exact cost.

Additional information: In some areas, if you’re not paid to date on your fees, the HOA can put a lean on your home and prevent a home sale while the balance is paid off.

“E.g.”: If your community charges $125 a month for HOA fees, it will be an additional cost on top of your P&I, PMI, insurance, and taxes.

Monthly breakdown of costs example

Here is an example breakdown of the monthly and yearly costs on a $300,000 30-year home loan with a 10% down payment:

ItemAmount / rateMonthly costYearly cost
P&I (Principle and interest)$270,000 starting principle and 4.75% interest$1,408$16,896
PMI (Private mortgage insurance)0.75%$168.75$2,025
Tax rate (Property tax)2.0% on $300,000 appraised value with a 20% homestead discount ($6,000 - $1,200 = $4,800)$400$4,800
Insurance.5% on $300,000 appraised value$125$1,500
HOA fees (Homeowners association fees)$125 monthly$125$1,500
Totals-$2,226.75$26,721

Remember, ultimately you’ll be the one paying the mortgage each month. So make sure you’re comfortable with whatever you sign on for. Happy house hunting!


Note: This post was originally featured on our other blog LifeWithinBudget.com in November 2013 before being migrated to this site.

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