How to Calculate Your Mortgage Payment

How to Calculate Your Mortgage Payment

If there is one thing you should know as a homebuyer, it is how to calculate your mortgage payment.

Every homebuyer wants to save on the cost of buying a home but must consider all the costs involved to do so. The monthly payment on a mortgage is the most important of those costs.

While you are in the process of buying a property, knowing what your mortgage payment will be can help you plan. It may also help you determine where you can cut costs before you commit.

As important as getting the best interest rate for a mortgage is, it is vital to know how to calculate your mortgage payment. Below we explore the different components that contribute to your mortgage payments and how to use this information to determine what you will pay each month.

Factors that influence how to calculate your mortgage payment

Decide on your down payment amount

When you take out a mortgage to buy property, you are usually required to make some form of down payment.

A down payment is a portion of the property’s purchase price that you pay upfront. It usually ranges from five to twenty percent of the property’s purchase price and is non-refundable.

The value of your down payment can affect your interest rate. A large down payment would come with the benefit of needing to borrow less to cover the remainder of the purchase price. In turn, borrowing less may result in a lower interest rate and smaller monthly repayments.

Determine the mortgage principal

An important step when considering how to calculate your mortgage payment is determining the mortgage principal.

The mortgage principal is the initial amount you will borrow from your chosen lender when taking a mortgage loan. In simple terms, it represents the property’s purchase price less the value of the down payment made.

While determining the mortgage principal is straightforward, one must also consider other more complex elements when calculating your mortgage payments.

Consider what insurance you need

There are two types of insurance you need to consider when identifying how to calculate your mortgage payment. They are private mortgage insurance, also referred to as PMI, and home insurance.

PMI is the coverage on a home loan that protects a lender from the risk of a borrower defaulting on the agreement. It is applicable and mandatory when a borrower makes a down payment of less than twenty percent.

This type of insurance will be a percentage of the mortgage principal. It can be anywhere between 0.2 and 2 percent of the amount loaned, depending on the size of the mortgage.

Home insurance, on the other hand, covers the property itself. It also usually includes the possessions in your home in case of damage or loss. There are eight different kinds of home insurance, and the amount you pay for home insurance will depend on how much coverage you need. 

While home insurance is not a prerequisite by law, your lender will require it if you take your mortgage loan through them.

Estimate the term and amortization period

There are two payment periods to consider when thinking about how to calculate your mortgage payment. These are the mortgage term and the amortization period.

The mortgage term is the length of time your home loan agreement is in effect. It relates to the terms, conditions, and the interest rate you settled on with your lender.

With a fixed interest rate, the mortgage term can be anywhere between 1 to 10 years. While with a variable interest rate, it can be either 3 or 5 years. You will have several mortgage terms within your amortization period.

The amortization period refers to the total amount of time it will take to pay off your mortgage loan in full. The maximum amortization period you can currently take is 30 years. However, if you make a down payment of less than 20 percent, the maximum possible amortization period is 25 years.

The benefit of taking a lengthier amortization period is that your monthly mortgage payments will be lower. However, you will then incur more interest over the lifespan of your mortgage, which could add up. 

When it comes to the mortgage term, the longer it is, the more stability you will have regarding your repayments and interest owed. You will know what to pay and when to pay it, and this can allow you to plan your budget for the future.

As you start understanding how to calculate your mortgage payment, it will be easier to distinguish the term from the amortization period.

Determine the interest rate

Interest is an amount charged by lenders when you borrow money. It is a percentage of the total amount loaned.

Interest rates vary from lender to lender and are influenced by the type of mortgage agreement. The term of a mortgage and the type of interest it carries determine the type of mortgage.

As you discover how to calculate your mortgage payment, you will need to differentiate and choose between two types of interest rates charged. You can either opt for a fixed or a variable interest rate. 

When dealing with a fixed interest rate, the percentage charged remains the same throughout the mortgage term. The advantage of a fixed interest rate is the stability that comes with knowing exactly how much interest you will owe the lender each month.

A variable interest rate, however, fluctuates as the prime rate changes. A borrower can end up paying either more or less interest than the initial interest rate. The uncertainty associated with a variable interest rate can be a disadvantage. However, you could pay less than the rate at the time of purchase if the interest rate dips during your mortgage term.

Once you have a type of interest rate in mind, you are one step closer to fully establishing how to calculate your mortgage payment. You can find the current interest rate online and include it in your calculation.

Factor in mortgage prepayments

An option available for some borrowers is paying off the mortgage early. However, many lenders prohibit prepayments. The reason is that they lose out on future interest when a borrower clears a portion of their loan balance at once. Therefore, to make up for the lost income, they will charge a penalty for prepayments.

If your lender does not charge penalties, prepayment could be an option when investigating how to calculate your mortgage payment.

If you find yourself in a position to make a lump sum payment toward your mortgage, it would be to your benefit to do so. The amount you prepay is at your discretion. But analyze your budget and current expenses carefully before making a prepayment to be safe.

The advantages of prepaying your mortgage are that you will save on interest by reducing your 

Account for additional fees

Over and above the mortgage insurance we discussed above, another cost to factor in is your property taxes. This is another essential part of the equation when looking at how to calculate your mortgage payments

The governing body of a province charges property taxes for maintenance of streetlights, roads, etc. Property taxes are determined by the market value of the property and the municipality’s property tax rate.

Your lender will most often include the property taxes in your mortgage payments automatically. The tax is levied according to your payment frequency. Therefore, if you make monthly payments, you will pay the principal interest and property taxes monthly.

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How to calculate your mortgage payment online

There are plenty of mortgage payment calculators available online that are free and easy to use. You will be required to provide the information we have listed for you in this guide on how to calculate your mortgage payment.

In the appropriate fields, insert the asking price of the property you wish to buy, the down payment amount, the amortization period, mortgage term, payment frequency, and current interest rate.

You will also need to include any applicable mortgage insurance quotes you have received in the appropriate fields.

Once you have input all the necessary information, you will receive an estimate of your mortgage payment.

To sum it all up

Understanding how to calculate your mortgage payment can help you during the home buying process. Once you have a property selected, you need the purchase price to begin your calculation. After you deduct the down payment you can make, you will arrive at the principal amount.

Other components required to determine how to calculate your mortgage payment are the interest rate, insurance, additional fees, and projected prepayments (if any). These will need to be added to the mortgage principal and broken down, dependent on the payment frequency, mortgage term, and amortization period chosen.

Even a rough estimate of a monthly payment can guide you towards determining what you can afford. In addition, it will be comforting to know how much you will likely pay for your property and what effect that can have on your budget and lifestyle.

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FAQs about Mortgage Payment

How do I calculate my mortgage payment?

As a homebuyer, it’s important to know how to calculate your mortgage payment. There are different options online for calculating your mortgage payments, they are all easy to use with no cost.

Why should I use a mortgage payment calculator?

A mortgage calculator can provide an overview of how much you need to pay monthly with any rate, which can help you see your financial situation accurately.

How does it calculate my mortgage payment?

Your mortgage payment will be calculated through your total mortgage amount, the amortization period of your mortgage and the rate of your mortgage.

How do I use a mortgage payment calculator?

It’s very simple, just use the calculator and enter the purchase price, then choose the amortization period and mortgage rate. The calculator will show the best rate in your province and show you what your mortgage payments will look like.

Are mortgage payment calculator free?

Yes. Most mortgage payment calculators are free and most of them can be easily accessed online. You would need to insert the price of the property you wish to purchase, the down payment amount, the amortization period, mortgage term, payment frequency and current interest rate.

June 22, 2021
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