How to Calculate a Mortgage Payment When You’ve Never Made One

It’s no secret that there’s lots to consider before buying a house, but one of the trickiest points for first-time buyers is often figuring out how to calculate a mortgage payment.

Sure, there are plenty of payment calculators available online (just Google “mortgage calculator” and you’ll be spoiled for choice), but mortgage payments contain several variables. It’s important to know what you’re getting into — both for financial awareness and your own peace of mind during what can be a long, stressful process.

With the help of HomeLight Home Loans expert Richie Helali, we’re going to review everything that goes into a mortgage payment (and what doesn’t!). We’ll share tips on how to estimate those costs, as well as how to figure out exactly what you’ll be paying each month after you’ve closed on your new home.

Ah, if only it were as simple as dividing the purchase price by the length of your loan term and calling it a day…

Here’s what you need to be aware of when calculating a mortgage payment.

1. Principal and interest

The majority of your mortgage payment will go toward principal and interest. The principal is the amount of money you’ve borrowed, while interest is essentially the fee you pay in order to borrow that money.

Depending on the type of interest you choose, you’ll have either a fixed-rate or an adjustable-rate mortgage — and in either case, the interest rate is determined by your credit history, the amount you’re putting down on the home, and current market rates, among other factors.

“It’s important to note that mortgages, similar to car loans, are amortized,” says Helali. “When you make that first mortgage payment, a large portion is going to go toward interest.”

What is amortization?

Amortization may sound scary or seem as though the loan is structured to benefit the lender, but it’s really just another word to describe a payoff schedule.

Each mortgage payment chips away at your principal balance, but in the beginning of an amortized loan, you’ll pay more toward interest. Over the life of the loan, this shifts to more of your payments being allocated to your principal. Let’s take a look at an example using an amortization calculator:

Say you’re purchasing a home for $250,000 with a 30-year, fixed-rate loan at 3.5% interest.

Your monthly payment (for principal and interest only, that is — more on the other factors shortly) will be $1,122.

The first mortgage payment will allocate $729 to interest, and $393 to the principal balance.

After 20 years, your payment will send $333 toward interest and $789 to principal. It’s a gradual shift, but as your principal balance decreases, there’s less of a foundation on which interest accrues.

To expedite the equity-building process and ultimately save money on interest, you can kick a little extra cash toward your principal balance. Whether you pay an additional $50 each month or make one extra mortgage payment each year, it all adds up.

2. Taxes and insurance

Taxes and insurance are the second category of what constitutes your mortgage payment, but they’re easily overlooked during the excitement of house-hunting.

“One thing that a lot of people do is — let’s say they’re renting an apartment for $2,500 per month and then they find a house — they look up a mortgage payment calculator and say, ‘Wow, my payment is only going to be $2,100 per month. If I buy this place and put a little money down, I’m going to save myself $400 each month,” Helali shares, warning that these calculators don’t tell the whole story.

Your property taxes and homeowner’s insurance will also be rolled into your monthly mortgage payment on top of the number you’re calculating online, and later disbursed from an escrow account when property taxes are due each year.

These costs aren’t as easy to estimate because property taxes vary by state and county, and homeowner’s insurance rates vary based on location, the size and age of a home, your credit and claim history, and much more. If you’ve ever insured a car before, you’ll know that the process is not as straightforward as buying a pair of shoes — and homes are even more nuanced.

How to calculate property taxes

Your best bet for estimating property taxes — aside from asking your agent or lender — is to pull up the tax assessor’s office for the county where your potential new home is located.

“Even if you’re looking [for a house] in multiple different counties, taxes are likely going to be a little different,” says Helali. “Look at the county website to get an idea of what the tax rate is. Or, you can just talk to a loan officer.”

Don’t be shy when it comes to asking questions.

How to calculate homeowner’s insurance

According to Insurance.com, the average annual cost for homeowner’s insurance on a home with $300,000 in dwelling coverage, $300,000 in liability coverage, and a $1,000 deductible is $2,305 per year. That’s an additional $192 per month to add to your initial mortgage payment calculation.

But because so many factors go into determining insurance rates, if you’re serious about knowing exactly how much you’ll pay, it’s best to pick up the phone and speak directly with an insurance agent.

If you already have auto or renter’s insurance, your current provider may be a good place to start. You can also — you guessed it — ask your agent or lender if they have an insurance agent to recommend.

3. Mortgage insurance

Your loan may be subject to mortgage insurance (MI) if you’re putting down less than 20% of the purchase price on a conventional loan, or if you’re taking out an FHA or USDA loan.

MI serves to protect the lender if a borrower defaults on their mortgage.  Defaulting on your loan will generally result in a foreclosure where the bank will sell your house in an effort to recoup their losses. MI is designed to make up the difference if the home does not sell for enough to cover the outstanding mortgage and other lender losses.

While mortgage payment calculators don’t usually account for MI, if your prospective loan is a candidate for this added expense, your lender will certainly let you know.

The cost for your mortgage insurance policy is “based on factors like the state that the property is in, your credit score, and level of down payment,” says Helali.

Different banks and financial websites have varying ranges of MI estimates, but it’s safe to assume you’ll pay somewhere between 0.25% and 1% of your total mortgage amount annually, broken into monthly installments and included in your mortgage payment.  Some lenders also offer what is called “lender-paid mortgage insurance,” where your lender will pay the premium for the mortgage insurance in exchange for a slightly higher interest rate.

The good news here (if there is such a thing) is that once you’ve paid down your loan to where the principal balance is below 80% of the home’s value, you can request that the MI be cancelled if you have a conventional loan (FHA and USDA loans have their own mortgage insurance rules). Or, the lender will automatically drop the insurance when you reach 22% equity. But, once again, talk to your lender for more clarification.

What’s not included in a mortgage payment?

At this point, you can be certain that principal, interest, property taxes, homeowner’s insurance, and borrower-paid mortgage insurance (if applicable) are the definite elements of your monthly mortgage payment.

HOA fees are solidly in the maybe category.

If the home you’re eyeing belongs to a homeowner’s association, be aware that HOA dues will be included when your lender calculates how much they believe you can afford. While HOA dues are generally not included with your mortgage payment, they will be calculated as part of your expenses, and you will have to budget to ensure you pay these dues.

This isn’t always the case, though. Some HOAs collect dues on a quarterly or annual basis, while others are a fixed monthly fee. Be sure to carefully read the covenants, conditions, and restrictions (CC&Rs) for the association to understand how and when you’ll be expected to pay your dues.

So, what expenses are not likely to be included in your mortgage payment? Suffice it to say: Everything else. Welcome to homeownership!

But in all seriousness, calculating your mortgage payment should not be the only budgeting you do prior to buying a house. You’ll be on the hook for maintenance expenses, repairs, landscaping, and the cost of any upgrades to the property.

It’s important to ensure that you won’t be stretched to your last possible dollar each month when you own a home.

“The important thing to really understand is people staying within their budget,” says Ed Kaminsky, a top Los Angeles-based real estate agent with 34 years of experience. When you’re estimating your mortgage payment, a solid rule of thumb is to stay under one-third of your gross income, which should encompass your whole payment.

In other words, if you’re earning $6,000 per month, aiming for a mortgage payment of $2,000 or less is ideal. In the eyes of your lender, you’ll be able to comfortably afford your monthly payments (as long as your other monthly debt payments aren’t too high). And — personal budgeting and lifestyle decisions aside — you’ll theoretically have enough cash available each month to cover unexpected expenses, or to be able to save up for larger home improvement projects.

Other costs you’ll be responsible for out-of-pocket include the deductible on your homeowner’s insurance in the event of a claim, and, in most cases, flood insurance. Flood insurance is required in some areas and highly encouraged in others, and while it’s sometimes possible to include the cost in your mortgage payment, these dues are usually a lump-sum payment situation.

“I’ve seen different policies in different places, and flood insurance isn’t necessarily all that expensive anyway — but it’s something you can ask your insurance agent about,” says Helali.

He also notes that since fire insurance may be required in areas at high risk of wildfires, (certain places in Hawaii even call for lava insurance), it’s worth asking around about any special insurance requirements or recommended coverage you may not be aware of for your region.

As ever, your real estate agent and lender are great places to start, and your insurance agent can answer any lingering questions and provide quotes.

For math enthusiasts only

If you’re the type who loves crunching numbers as a hobby or thinks of online calculators as a shortcut, there is a complicated formula you can use to do the equivalent math by hand:

M = P [ I (1+I) ^ N ] / [ (1+I) ^ N – 1]

• M is your monthly mortgage payment
• P is your loan principal
• I is your interest rate
• N is the total number of payments you’ll need to make (i.e., 360 payments for a 30-year loan, or 180 for a 15-year loan)

You’ll note that this formula assumes a fixed-rate loan and only works to calculate your mortgage payments with principal and interest. Taxes and insurance are not included, so you’ll still need to clarify those expenses separately

The best way to calculate your mortgage payment

It’s completely fine to start your estimates with a reliable online calculator. HomeLight offers calculators to help you determine how much home you can afford, how much cash you should put down, and what your closing costs may look like.

But remember, while online mortgage calculators (or by-hand formulas!) may be a great resource for quick estimates, they don’t offer total insight into how much you’ll pay each month.

“It’s always important to note that, yes, your mortgage payment and the interest rate you get are going to be important, but you also have to ask, ‘Well, how much is my insurance going to cost, and how much are my property taxes going to be?’” Helali says.

The best way to determine this information is to gather all your details — from your own financial and credit details to all the specs on your prospective home — and talk to experts. Your real estate agent, mortgage lender, or financial advisor can help you decide how to responsibly take your next steps toward buying a home.

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