As in – what is it paying for beyond the mortgage calculator calculations?

Using a mortgage calculator is a great way to estimate what your monthly mortgage payment will be. Try our free mortgage calculator by clicking here and entering your loan amount, interest rate, and amortization period to see your monthly payment, total interest payable, and total amount of your principal plus interest.

However, it’s important to know exactly what you’re paying each month. Anyone can take the home property value and enter it into a mortgage calculator to determine the monthly amount. While a mortgage calculator is great for calculating your monthly payments, there are a lot more factors that get calculated into the price the calculator misses which may result in higher payments.

Knowing what it all costs can help you answer the important rent vs. buy question, and also key to knowing how much house you might be able to afford if you decide to take the path to homeownership. Lenders will also use the PITI payment (principal, interest, taxes and insurance) to determine your monthly housing expense, which is then used to calculate your DTI ratio (debt-to-income). This can be confusing to anyone, but once you know where each dollar goes towards, you will have a better knowledge of your payments. Read below to see what is included in your monthly mortgage payment:

1. Principal – This would go towards the total home purchase price minus the down payment. For example, if you are purchasing a $500,000 house and you put $20,000 down, then your principal would be $480,000.
2. Interest – This is the fee the lender charges you to loan the money towards your purchase. Your interest rate gets calculated by what the current market is at the moment and your credit score. The higher your score is, the lower your interest rate will be. This fee is steady unless you obtain an adjustable-rate mortgage, which will cause your interest rate to go up or down in due time.
3. Property Taxes – This is the yearly amount that is assessed by the government based on your home and property. Your property tax gets put towards municipalities like schools and organized recreation areas like parks. Property taxes tend to rise over time, so expect your monthly payments to go up as well.
4. Homeowner’s Insurance – Homeowner’s insurance is made to cover any losses and damages that occurred towards your house and their assets, as well as liability coverage towards any accidents made in the home or on the property. This amount will stay the same as long if your premiums stay the same.
5. Mortgage Insurance – There are many programs available today that does not require putting a 20% down payment to purchase. However, if you decide to put less down, you might be required to pay mortgage insurance. Mortgage insurance, or PMI, protects the lenders if a borrower defaults on their mortgage. Depending on the type of loan you’ve obtained, once the equity of your property is 20% of the overall value, your mortgage insurance could be removed. To inquire more about this, ask your loan officer to direct you to the right program.
6. Homeowner’s Association – Also known as HOA, this fee goes towards the organization that assists with the common upkeep and improvements on shared amenities and spaces. Those fees are typical for anyone who purchases a condominium, townhouse, or in a planned development section.

PMI (Private Mortgage Insurance) – Depending on the amount of your down payment, you may be required to pay PMI. Anything less than 20% down generally requires PMI. Loans with small down payments involve substantially more risk for the lender, they need protection in case something happens and the borrower cannot repay the loan balance. Because this insurance is available, lenders can offer loans with lower down payments, which is great for first time home buyers that have little or no money to put down.

PMI may require an up-front fee which is payable as part of your closing costs (which will be fully disclosed and explained to you by your loan officer) and is also required to be paid monthly with your payment. The cost of PMI varies according to the amount of your down payment.

FHA loans charge a fee for mortgage insurance call MIP or Mortgage Insurance Premium (sometimes referred to as UFMIP or up-front mortgage insurance premium). An up-front fee (which may be financed) and a monthly fee are assessed by the lender and FHA. Additionally, VA loans charge a funding fee which may also be financed, even though they require zero money down.

In the beginning of the loan term, mortgage payments primarily go toward paying off interest because the loan balance is so high. While this may be viewed as a negative, it actually means mortgage interest tax deductions are bigger and more beneficial early on which can be helpful. As the outstanding balance decreases, more of the monthly mortgage payment will go toward principal each month until you eventually own the home outright. This is how mortgage amortization works.

This also explains why some savvy homeowners choose to make biweekly mortgage payments, thereby increasing the amount of principal paid early on and decreasing the amount of interest paid over the life of the loan. By making payments this way, you will also shorten your mortgage term, which is beneficial if you want to own your home sooner, but don’t want the commitment of larger payments associated with certain loan programs such as the 15-year fixed.

It’s important to remember the longer your loan term, the more you’ll pay in interest because the loan is paid off slower. If you’re able to accelerate your payoff, you’ll pay less interest.

If you’re trying to figure out what you’ll be paying your lender each month, consider all the costs associated with a mortgage payment and your mortgage rate. You start with the home’s price, which will be driven by the health of the housing market. Your credit score is also a huge factor, as is down payment, loan program and DTI.

While the mortgage calculator is a wonderful resource calculating your monthly payments, keep in mind that more factors go towards the price besides what is represented by the calculator. Hopefully, this breakdown showed you where your money goes to each month and puts your mind at ease.

Do you have questions about how your mortgage payment would be calculated and want to speak with a licensed loan officer in your area at no cost to you? Hit the red ‘Apply Now’ button below and we will answer any questions you have.