Log InJoin 

How To Estimate A Monthly Mortgage Before Buying A Home

How To Estimate A Monthly Mortgage Before Buying A Home

If you are not purchasing a home by paying cash then it is important to know with some amount of certainty what your monthly mortgage payment will likely be. To estimate a monthly mortgage before buying a home you can use various online resources which provide mortgage calculators or understand the basics to get a general idea of what comprises a mortgage payment. Coming up with a ballpark figure on what to expect to pay can go a long way towards working with your existing finances and debt load and can prevent you from buying more home than you can afford.

A monthly mortgage payment normally consists of two primary factors which include numerous sub amounts. The first factor is often referred to as P&I or more correctly principal and interest. When a mortgage is taken out from a financial institution for $150,000 that is considered the principal amount which is then loaned to a homeowner at an interest rate of 5% per year. The loan is then amortized over either 15 or 30 years to come up with a fixed monthly payment. The key to this payment schedule is that the interest is included in the monthly payment for the duration of the loan. What is not clear is how much is being paid to principal or interest in that it is not an equal amount every month. Most mortgages are weighted heavily in that the monthly mortgage payment is primarily interest for the first five years or so and little principal is paid. Regardless the monthly principal and interest total will be consistent for 360 payments on a 30 year loan.

The principal and interest is only the first part of the monthly mortgage payment. The second factor is commonly referred to as the escrow amount. Escrow includes various smaller payments that are normally required by the mortgage lender or the federal government and is included as part of the monthly mortgage payment. Escrow often includes property taxes, homeowners insurance and sometimes PMI. PMI stands for Private Mortgage Insurance and is often required on government-subsidized loans where a minimum payment of 20% down is not applied when the home is purchased. For homeowners which are able to make the 20% down payment they can often avoid the PMI part of escrow.

A monthly mortgage payment generally includes the principal and interest in addition to the escrow amount but those aren't the only fees or costs involved. Monthly homeowners association dues are fees and other costs associated with managing the property should be considered when estimating the monthly mortgage payment. By building a cushion to plan for unexpected expenses of $50-$100 per month you can help mitigate any shortfall after moving into the home which could place you under significant financial burden.

One key variable to keep in mind when looking to purchase a new home especially if it's something that is being planned for in the future is current mortgage loan interest rates. It is common for prospective homeowners to be able to purchase more home than they normally would be able to when interest rates decrease. A one percentage drop in mortgage interest rates could equal hundreds of dollars in lower monthly mortgage payments. If it looks like interest rates are trending up you may want to purchase a home sooner rather than later since the longer you wait and the higher interest rates go the less home you may be able to buy.

All of this information is helpful when estimating the monthly mortgage before buying a home but you don't have to rely solely on your calculations and insight. Speaking with a local financial institution like your current bank or credit union can help clear up some of the mystery regarding monthly mortgage payments. These institutions will often conduct a mortgage pre-qualification for free by asking various questions about monthly income and debts and then calculate how much of the loan you qualify for. The nice thing is that in a 30 minute conversation they could quickly tell you that you qualify for $120,000 mortgage which would equal $800 per month mortgage payments. If you go this route be sure to bring in important financial documents for the lender so they can accurately determine how much home you can afford and what your monthly mortgage payment is likely to be.

Image by: Photo Dean