Calculating an exact mortgage payment without a calculator on a loan is no small task, but there are some simple rules-of-thumb you can use to get a close estimate.
With the exception of the MIT Blackjack Team, performing this type of complex math in your head often leads to frustrating rants.
When coming up with a rough estimate, it is important to understand the individual components that factor into the overall monthly mortgage payment.
Yes, the thousands of dollars you send to your lender every year may cover more than just the mortgage, but referring to one simple formula will help you gauge what the new payment will be as you’re out looking for new properties that may be in your price range.
What’s In A Mortgage Payment?
A mortgage consists of 4-6 parts:
- Principal – the balance of the loan
- Interest – the fee paid to borrow the mortgage money
- Property Taxes – based on county assessed value and residence type
- Hazard Insurance – in the case of fire or property damage (may include a separate flood policy)
- Mortgage Insurance – more than 80% LTV on conventional loans, or with FHA financing
Most lenders use the acronym (PITI), which includes Principal, Interest, Taxes and Insurance.
And in the case where a separate Mortgage Insurance Premium is required, we add another “I” to the end of that creative series of letters.
Another monthly expense that you have to consider is the monthly dues that come with properties that have a homeowner’s association (common in condominiums and other developments). This isn’t a payment made to your lender, but you will have to qualify with that payment and it is also best practice for you to factor that in the monthly cost of your new home.
Confused yet? Don’t worry, this is slightly easier than most state bar exams.
The Mortgage Payment Cheat Sheet:
Ok, you’ve made it this far and haven’t closed your browser, so that is a good thing.
Please keep in mind, this top secret formula will by no means be exact.
Mortgage Payment Formula:
For every $1000 you borrower, your TOTAL monthly mortgage payment will be $8.
So, if you purchase a home for $250,000 with a $50,000 down payment – borrowing a total of $200,000, then a good estimated total monthly PITI payment would be roughly $1600.
But don’t forget to add your homeowners association dues to that monthly payment.
What If I Pay Taxes and Insurance Separately?
Well now we’re at the easy part. If you elect to pay taxes separate from your mortgage, the cheat sheet is reduced from $8 per $1000 down to $6 per $1000.
So there you have it. $8 for every $1000 borrowed.
Again, please keep in mind that this is not going to give you an EXACT payment. You may be purchasing a property with higher real estate taxes or your insurance premiums may be higher than average depending on the state you live in.