Calculating your Home Mortgage

The interest rate you pay makes a significance difference in your monthly house payments. If you borrow $100,000, and take out a 30 year loan at 4 percent interest, your monthly payment to cover just this amount will be approximately $477. If the interest rate is 6 percent, your monthly payment jumps to about $600 a month.

Some consumers opt to pay points, to bring down interest rates. A point is one percent of the loan amount. Before paying points to bring down your interest payments, calculate how long it will take you to pay back the cost of points, in interest savings. If you plan to stay in the house 30 years, it may be a smart choice. Yet, if you intend to move within 5 years, it might not be a wise financial decision.

 Private Mortgage Insurance

If you don’t have a large enough down payment, you may be required to pay private mortgage insurance, or PMI. Government regulations require many lenders to limit their loan amount to 80 percent of the home’s value. This means, if you are purchasing a home for $100,000, you will need to put down $20,000 cash. If the house only appraises for $90,000, the lender will only loan you 80 percent of the $90,000 appraised value.

One way to get into a new house with a lower down payment is to purchase private mortgage insurance. The monthly premium is included with your house payment. If you put down just 5 percent instead of 20 percent, the PMI covers the unpaid 15 percent, should you default on your loan. This payment may, or may not be, tax deductable, depending on your financial situation. After you build sufficient equity in your home, there are ways to eliminate PMI.

Two other expenses attached to your new home are homeowner’s insurance and property tax. Some lenders require you have an impound account, which means your monthly house payment includes additional funds to cover these expenses. The lender, rather than the buyer will make the insurance and tax payments. Some borrowers prefer not to have an impound account, and manage this payment separate from the monthly house payment. For some consumers, eliminating the impound account creates problems, especially if they have difficulty budgeting monthly expenses.

If the property is part of a homeowner’s association there may be association fees. This is common with condominiums. The additional monthly fee typically covers maintenance on the grounds and common areas, and may include water and trash expense.

When calculating your home mortgage, remember to consider you loan fees, which are often rolled into your home loan. Once you come to a clear understanding on what you can afford to pay each month, along with your monthly fees, you will be in a better position to start shopping for that new home.