Buying a home is a major life decision, one that often represents the largest purchase you’ve ever made, so it’s important to know what you’re getting in to before you start house shopping. The amount you borrow for your mortgage is a significant factor in determining your monthly mortgage payment, but it isn’t the only factor in the mortgage payment formula. In addition, though your mortgage payment is a large part of your costs of home ownership, it’s not the only cost that you need to consider.
Factors Affecting Your House Payment
Besides the amount of money you’re borrowing, your monthly mortgage payment also depends on your interest rate and the term of your mortgage. The higher the interest rate, the higher your monthly payment will be because you’ll be paying more in interest. The longer the term of your mortgage, the lower your monthly payment will be because you’re stretching out the repayment over a longer period of time.
However, you will pay more in interest over a mortgage with a longer term. For example, your monthly payments for a 15-year mortgage will be higher than a similar loan with a 30-year term, but the 30-year mortgage will cost you more over the life of the loan.
House Payment Formula
The house payment formula is complicated, so you’ll need a calculator. Follow these steps:
- Convert your annual interest rate to a monthly interest rate by dividing by 12.
- Add 1 to the result.
- Calculate the result raised to the negative power of the number of monthly payments over the life of the mortgage.
- Subtract the result from 1.
- Divide your monthly interest rate by the result.
- Multiply the result by your $300,000 loan to find your monthly payment.
For example, pretend you have a 30-year mortgage at 4.8 percent. You will follow these steps:
- Divide 0.048 by 12 to get 0.004.
- Add 1 to get 1.004.
- Raise 1.004 to the -360th power to get 0.2376.
- Subtract 0.2376 from 1 to get 0.7624.
- Divide 0.004 by 0.7624 to get 0.005247.
- Multiply 0.005247 by $300,000 to find your monthly payment will be $1,574.
Other Mortgage Payment Considerations
When deciding whether you can afford the monthly mortgage payment, remember that your mortgage payment isn’t the only cost of owning a home. You’ll also need to pay for home insurance, real estate taxes and, depending on the size of your down payment, mortgage insurance. In addition, if you have an adjustable rate mortgage, your monthly payment could go up or down as interest rates change over time.
- If you have any other monthly housing costs, such as homeowners’ association dues, add those to your PITI payment.
- To calculate a house payment on a loan amount other than $300,000, substitute $300,000 for the loan amount in Step 6.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."