How To Calculate Your Monthly Mortgage Payment: A Guide // Mortgage Calculator // Jeff Smith

If you're considering purchasing a home or refinancing your current one, you likely have many questions. These may include concerns about interest rates, expected monthly payments, and potential savings through early loan repayment.

Jeff Smith, founder of Tiger Home Loans, will guide you through the process of calculating your mortgage payment step by step. Additionally, he will provide insights into the variables that constitute this equation, offering strategies to save money and improve your financial preparedness. He will also introduce various mortgage calculators tailored to different scenarios.

Breaking Down Your Monthly Mortgage Payment:

Your monthly mortgage payment consists of various financial components, including the loan amount, interest rate, loan term, and other factors:

**Loan Amount:** For homebuyers, input the home price and deduct your down payment. In refinancing, use the expected balance after closing.

**Interest Rate:** Focus on the base rate, not the annual percentage rate (APR), as it affects monthly payments more. The majority of initial payments primarily cover interest.

**Loan Term:** Longer terms, like 30-year mortgages, result in smaller monthly payments but higher overall interest costs. Shorter terms, like 15-year mortgages, have the opposite effect.

**Mortgage Insurance:** If your down payment is less than 20%, you may pay private mortgage insurance (PMI). Its rate depends on factors like down payment, credit score, loan type, and occupancy.

**Property Taxes:** Account for property taxes, often included in your mortgage payment, as a cost of homeownership.

**Homeowners Insurance:** Lenders mandate homeowners insurance; it can be included in monthly payments or paid separately.

**Homeowners Association (HOA) Fees:** These are not typically included in monthly payments but can impact your budget and loan eligibility.

Calculating Your Mortgage Payment:

You can calculate your payment manually using this formula:
```
M = P [ I(1 + I)^N ] / [ (1 + I)^N − 1]
```
Breaking it down:
- M = Monthly payment
- P = Principal amount (loan balance)
- I = Interest rate (monthly rate, not APR)
- N = Number of payments (loan term in months)

Alternatively, use a mortgage calculator for simplicity.

Types of Mortgage Calculators:

1. **Purchase Calculator:** Helps determine financial readiness by considering sale price, down payment, credit score, income, other debt, ZIP code, and HOA fees. Provides insights into cash needed for a down payment and affordability.

2. **Refinance Calculator:** Assists in evaluating refinancing options based on goals (e.g., lower payments, faster payoff, cash-out), current loan amount, estimated home value, credit score, mortgage balance, other debt, and expected duration in the home.

3. **Amortization Calculator:** Displays principal and interest payments over the loan term. Input current loan amount, loan length, interest rate, and location. Discover the impact of additional payments on interest savings and loan duration.

Ready to take the next step in your homeownership journey? Start your mortgage application online with Tiger Home Loans and Jeff Smith today to secure your fina

Important Links & Info:
Follow Jeff:
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LinkedIn: https://www.linkedin.com/in/jeff-smith-40627016/

Jeff Smith - Tiger Home Loans
📲 480.909.4000
📩 [e-mail]
🔗 www.tigerhomeloans.com
Equal Housing Opportunity
Tiger Home Loans NMLS: 2425582 NMLS: 4

Episode Transcript

Jeff Smith (00:00):
If you ever jumped online and tried to calculate
what the payment would be on amortgage and you Google mortgage
calculator, all these linkscome up and it's super confusing
trying to figure out what to do.
Well, today I'm going to helpyou break that down, give you a
simple way to run some numbersand give yourself a good
understanding of what a mortgagewould cost you and what the
payments are going to look like.
Welcome to the show.

(00:25):
Fairways and finance.
My name is Jeff Smith.
I've been in the mortgagebusiness for 16 years top
quarter percent LO Nationwideand you know this podcast.
We want to talk about yourfinances, how to grow and
accumulate wealth and all thingsrelated to the mortgage
industry.
But we're golf lovers here aswell, so we're going to work in
some golf.
Don't worry for my golf loversout there.

(00:45):
We got you and I hope you enjoythe show.
The mortgage calculator that Ilike to use is just the most
simple one out there and it'sGoogle's mortgage calculator.
So if you Google mortgagecalculator, up on the page is
going to pop up a calculatorthat you don't have to click on.

(01:06):
It's just embedded there in thefirst page on Google and so
very simple.
It's got the loan amount, it'sgot the interest rate and it's
got the term of the loan andthen it's going to spit out the
monthly payment for you.
So that's really all that youneed.
Some of the other calculatorsout there online get way too in
depth and then it's overwhelmingwith all the options you've got
to pick through.
So Google's calculator, usingChrome as your browser that's

(01:30):
the simplest one to use.
Now, if you want to calculate amortgage payment and get an idea
of what a housing payment isgoing to cost you at a given
price, there's some numbers thatyou have to know to accurately
get a payment.
Ok, so the first is thepurchase price of the home.
So whatever you're looking atas the price, you're going to

(01:51):
take that minus your downpayment.
So we're not putting in theprice of the home.
You're making a payment basedon the balance of your mortgage
and how much you owe.
So the starting balance on themortgage is going to be the
difference between the downpayment and the purchase price.
So for a first time home buyer,you could put as little as 3%

(02:13):
down.
In a lot of situations Repeatbuyers you're putting at least
5% down and then another commondown payment to avoid what's
called private mortgageinsurance is 20% down.
So I think if you back into 3%,5% or 20% down, those are going
to fit most people's scenarios.
So let's say it's 3% down asyour down payment and let's say

(02:36):
your purchase price is $400,000.
You would take $400,000 times0.97 on your calculator and that
number is the loan amount.
So that's what you're going toenter into Google's mortgage
payment calculator as the loanamount.
Now the next component we needis the rate, and so interest

(02:58):
rates change daily.
So this is a moving target, andinterest rates are also going
to be dependent on your creditscore.
So rates available, even on anygiven day, are going to be
different for each person andtheir scenario.
However, if you Google FreddieMac mortgage survey, it's going

(03:20):
to pull up Freddie Mac'smortgage survey, which they do
weekly, and they survey a bunchof the biggest lenders in the
country and then put togetherthe average rates for that week
in a little article that you canpull up when you Google that,
and so those numbers are,depending on what day of the
week you're looking at it, up toone week old, but it's going to
be pretty close and I would usethat average number that

(03:43):
Freddie Mac is spitting out,we're just getting an estimate
of what the payment is going tobe.
So that's going to get youpretty close.
The next so now you're going toinput that rate, you've input
your loan amount and now you'regoing to input your loan term.
So the most common loan termthat we see on 90 plus percent
of mortgages is 30 years.

(04:04):
That's kind of a benchmarkstandard.
So unless you are anexperienced buyer, you are
likely going to finance a30-year mortgage.
So select 30 years is the termand now hit Calculate.
So now you're going to havethis monthly payment that the
Google Calculator has spit out.
That is the payment just forprinciple and interest.

(04:25):
So that's the payment for themortgage itself.
But when you finance a mortgage,your total monthly payment is
going to be the mortgage plusthree other components.
So the first component ishomeowners insurance.
That's an insurance policy thatyou would take out to protect
the property for major hazardslike fire or water damage.

(04:46):
So homeowners insurance on theaverage priced home anywhere
from $300,000 to $700,000, thisis going to vary across the
country depending on what stateyou're in, but you're looking at
anywhere from $65 to $125 amonth for most homes.
So you're going to fitsomewhere into that bucket,

(05:08):
unless you're buying a reallyexpensive home or unless you're
buying a home that is in an areawhere there's a lot of natural
disasters or flood potential.
So somewhere between $65 and$125 a month you're going to
want to add that for homeownersinsurance.
The next component is propertytaxes.
So property taxes again aregoing to vary by state, because

(05:29):
property taxes are levied by thecounty within each state and so
we're going to see fairlysignificant fluctuation between
states based on property taxes.
So you could look up propertytax rates for your state.
Now it gets a littlecomplicated because that's going
to be based on the tax assessedvalue, which is not the same as

(05:51):
the purchase price of the home.
So that's going to get you downa rabbit hole.
If you wanted to keep it simple, for most middle of the road
states your average priced homebetween $300,000 and $700,000,
you're going to be looking at aproperty tax bill somewhere
between $2 to $450 a month,depending on what part of that

(06:13):
spectrum that you're in.
So, excluding high taxed stateslike Illinois and California
where you've got more expensiveproperty taxes even some other
states like Florida and Texas,you see a little bit higher for
property taxes, but taking thoseoutliers out of the equation,
that $200 to $450 a month isgoing to fit most scenarios.

(06:36):
Now you would just need to bumpthat up a little bit more as
you get into higher price points.
Here's a little hack If you havea specific home in mind, pull
the home up on Zillow.
When you're on Zillow's page onthe listing for the home,
scroll down and about midwaydown it's going to give you the
property taxes per year.
So you would take that numberon Zillow, divide it by 12.

(06:59):
That'll give you the exacttaxes for that particular home.
So that's another great way tojust double check if you're
estimating correctly based onyour market area.
And then the final component forthe mortgage payment would be
private mortgage insurance, pmi.
So this is a secondaryinsurance coverage that you
would have on your mortgage ifyou make less than a 20% down

(07:23):
payment.
So 20% is the threshold toavoid PMI.
Now PMI also can fluctuatebased upon your credit score and
based upon the amount that youput down.
The more you put down, the lessthe PMI is.
But in a lot of cases whenpeople are paying PMI they're
either doing three or five or10% down for the down payments

(07:45):
or they're in one of thosehigher tiers.
A safe number to use for PMIwould be 0.3% of the loan amount
divided by 12.
So let me double check myselfhere on my calculator.
If I take a $400,000 loan andlet's say we're doing 5% down,

(08:06):
so I'm going to take $400,000home, $400,000 for the purchase
price.
I'm going to take $400,000times 0.95, that's 95% of the
purchase price of the home,which is the same as a 5% down
payment.
That's a loan amount of$380,000.

(08:29):
And then we're going to use0.3% per year for the cost of
PMI.
So $380,000 times 0.003, youhave to do two zeros because
it's 0.3%, not 3%.
So $380,000 times 0.003, equals$1,140 per year.

(08:54):
And then I'm going to dividethat by 12.
So my monthly PMI is $95 amonth.
So that's a ballpark.
I think in that price point youcan see PMI anywhere from $50 a
month to $150 a month dependingeven $175 a month, depending on
your down payment and yourcredit score.

(09:15):
So we're just trying to get aballpark here of a monthly
payment.
So now we've taken theprincipal interest for the
mortgage which we got on theGoogle calculator.
We've added up homeownersinsurance, property taxes and
PMI.
That is your total monthlypayment.
Now, especially in areas whereyou've got newer homes, a lot of

(09:37):
residential neighborhoods arenow in an HOA, a homeowners
association.
So when you have a mortgage ona home in a HOA you're going to
have an HOA payment.
The HOA is usually billedsemi-annually or quarterly and
you pay that directly to thehomeowners association, so it's
not bundled as part of yourmortgage.

(09:59):
The other numbers that we justdiscussed here would all be
bundled together as part of yourmortgage payment.
But in terms of HOA you'regoing to see on average between
$50 to $130 a month for mostcommunities.
Again, if you get into a higherend community or a community
with a pool, it could be more.
So if you're trying to get anidea of what's HOA going to cost

(10:21):
you, $75, $95 a month is apretty safe number.
So that's everything excludingthe utilities.
But again, that HOA payment isa separate monthly or quarterly
or semi-annual bill that you'regoing to pay directly to your
homeowners association.
Now what else can we use inmortgage calculator for?
Well, one common fee that mayor may not exist on a mortgage

(10:47):
you get is called discountpoints.
So discount points is a feethat you pay in exchange for a
lower interest rate.
So discount points is apercentage of the loan amount
and you're paying that to get alower rate.
So let's say that the ratetoday is 6.5%, with no points,

(11:09):
no discount points.
So that's what we call the parrate.
If you pay discount points, andlet's say you pay 1% in discount
points, so 1% would mean 1% ofthe loan amount.
So if we stick with this$400,000 purchase price, 5% down
, you're financing $380,000 forthe loan.

(11:33):
So if we stick with the$380,000 loan as our example and
you pay a 1% discount point,that is $3,800.
So 1% of $380,000.
So your discount points of$3,800, this will vary on the
day.
So this is not an exact number.
But at 6.5% rate you pay a 1%discount point.

(11:56):
You're probably going to getclose to a 6.0% rate.
So that would reduce theinterest rate by about half a
percent.
Now there's what we call abreak-even calculation to see if
it makes sense to pay points.
So let's say that thedifference in payment between
6.5% and 6% on a $380,000 loan,let's say that's $125 a month.

(12:24):
Now you could actually doublecheck that on the Google
Calculator.
So you would put in your$380,000 loan amount, you would
put in 6.5% as the rate andactually I'm just going to go
ahead and do that right now onmy phone, so let me pull this up
here.
So, mortgage calculator so I'mgoing to put in $380,000

(12:56):
interest rate of 6.5%.
That's a principal and interestpayment of $2,402.
If I drop this down to 6.0, nowit's $2,278.
So $2,402.
Minus $22.78.
That's a difference of $124 amonth in the payment.

(13:18):
You're paying $3,800 upfront tosave $124 a month.
So if we take the upfront cost$3,800, divided by the monthly
savings of $124, that is 30.6months to break even, meaning

(13:38):
after 30.6 months you will havesaved $3,800 on your monthly
payment.
So now you are break evenbetween those two options.
Every month thereafter is a netsavings.
If you take the 6% interestrate option, 30.6 months is
about 2 and 1 half years.

(13:59):
So if you ended up refinancingyour mortgage or selling your
home in 2 and 1 half years orless, you would actually save
money by taking the higherinterest rate of 6 and 1 half
percent and spending $3,800 lessin closing costs at closing.
So that's what we call thebreak even point.
I generally recommend payingpoints if the break even is

(14:22):
three years or less.
The average mortgage is heldfor seven years and after seven
years most people have eitherrefinanced or sold their home.
So statistically I like to seemy clients less than half of
that statistical average forbreak even, with an exception of
market conditions.
So the market conditions rightnow.
Rates have been elevated thelast two years and now we're

(14:44):
starting to see rates come down.
So I think there's a reallygood chance that anyone who
bought a home in the last yearor who buys a home over the next
6 to 12 months, they'reprobably refinancing within the
next couple of years if ratescontinue to come down.
So I actually would notrecommend paying points in this
environment unless the breakeven was 12 months or less.
So that's discount points andthe break even analysis.

(15:07):
And then when you're looking atmortgage rates online or you're
looking at mortgage calculators,you're going to see different
options for the loan.
So the most common loan is a30-year fixed-rate mortgage.
Other options in the fixed-ratecategory are shorter terms.
So you could do a 20-yearmortgage, you could do a 15-year

(15:28):
fixed mortgage, you could do a10-year fixed-rate mortgage and
you could do any number of yearsin between.
You could also do a 40-yearmortgage, but that would be at a
higher rate and significantlymore interest overall.
So those are your fixed-rateoptions.
Now you're going to get a lowerrate when you get down to a
20-year and a 15-year mortgage,so there is some incentive to

(15:51):
finance for a shorter number ofyears.
However, the total monthlypayment is going to be
significantly higher becauseyou're paying it off.
You know, in the case of a15-year you're paying it off
twice as fast Even with a lowerrate, still going to be paying
significantly more per month.
Now another common type ofbuy-down that we see in the

(16:12):
market place is what's called a2-1 buy-down.
So 2-1 buy-downs.
It's a temporary rate buy-downand what it does is it lowers
the interest rate for the firsttwo years of the mortgage.
So a 2-1 temporary buy-down.
Let's go back to our 6.5%interest rate example.
2-1 temporary buy-down you'regoing to have a 2% lower rate in

(16:34):
the first year, so 4.5%.
You're going to have a 1% lowerrate in the second year, so
5.5%.
And then in year 3 through 30,the interest rate will be 6.5%.
So it is a 30-year fixed-ratemortgage.
This is not an adjustablemortgage and the cost of the
temporary buy-down has to bepaid for by the seller.

(16:57):
Now, depending on how muchyou're putting down the cost of
the temporary 2-1 buy-down isapproximately 2% of the purchase
price.
So on our $400,000 example it'sabout $8,000 for a 2-1
temporary buy-down.
So that $8,000 at closing ispaid for by the seller and then

(17:20):
it goes into the escrow accountfor the mortgage.
So let's say in year 1, themonthly payment is $8,000.
$350 a month less.
Every month $350 is coming outof that $8,000 sitting in the
escrow account to cover theshortage in interest.
So that difference is paid outof the escrow account over those

(17:44):
first two years.
Where there's a big advantagewith the 2-1 temporary buy-down
is that if you refinance themortgage within the first two
years, any unused portion of thetemporary buy-down money is
refunded back to you in the formof a principal reduction
against the loan.
So what's happening is theinterest on the mortgage is

(18:04):
being prepaid at closing andthat's why the seller or the
lender or even the realtor couldcover the cost of the temporary
buy-down.
But it cannot be paid for bythe buyer Because you're not
actually saving any money if youpay for it yourself as the
buyer.
All you're doing is justprepaying the interest for those

(18:26):
first two years.
So the cost of the 2-1temporary buy-down is exactly
the difference in interest overthose first two years, making a
payment at a lower rate.
So it's not actually a fee,it's just the interest being
prepaid, a portion of theinterest being prepaid at
closing.
So that's a great option to usewhen we think that mortgage

(18:46):
rates are coming down in thenear term, which is the case in
this market right now.
I've had a lot of clients do 2-1temporary buy-downs over the
last 12 months and I thinkthat's going to work to their
advantage because I think a lotof those folks are going to refi
here this year in 2024.
So with the 2-1 temporarybuy-down, going back to that
Google mortgage calculator, youcan plug in your 6.5% interest

(19:10):
rate.
Then you can change the rate to4.5% to see what the payment
would be in year one, change therate to 5.5% to see what the
payment would be in year two andthen it's 6.5% would be year
three through 30.
So as long as you'recomfortable making the payment
at the rate from year threethrough 30, then you're not

(19:31):
setting yourself up for acatastrophe when that monthly
payment gets up to 6.5%, becausewe cannot predict what market
rates are going to do it'spossible you take that 2-1
temporary buy-down Rates don'tgo down and you don't end up
refinancing the mortgage.
So you want to make sure whenyou use that product that you're
comfortable making thatlong-term payment from year
three through 30.

(19:51):
That's all there is withmortgage calculators.
It's exciting stuff.
I'd love to answer any questionsyou have related to that.
Shoot me a DM.
I'm always happy to help.
Hey guys, thanks for listening.
I hope you enjoyed the show andgot some valuable information
out of it.
I want to help to educateothers and help people grow
their business and build wealth,and I can only do that with

(20:13):
referrals and your help gettingthe word out about this podcast.
So if you come across someoneyou think could benefit from
this, please share it with them,and if there's nobody who comes
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So appreciate your support.
Thank you.