How to Calculate Mortgage Costs
A mortgage is one of the only types of loans that does not have the word "loan" in it. This paints it as something different than, say, a car loan, and for good reason. It is, by far, the largest and most complicated loan that most individuals will ever take out. Because of this, there is a lot of confusion and stress associated with finding the right mortgage. However, using four pieces of information and a little bit of math, determining how much you'll pay for your mortgage is not a difficult process.
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Instructions
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1
Determine the total mortgage amount. This is how much money you will be loaned to purchase the house. This figure does not include any interest. For our example, we will be assuming you will be applying for a mortgage of $350,000.
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2
Determine the term of the mortgage, or how long you will be paying it. As a general rule, the shorter the term of your mortgage, the less you will have to pay overall, but the more each individual mortgage payment will be. For our example, we will be assuming a 30-year mortgage.
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3
Determine how many payments you will make annually. This can vary, but one payment per month is common, which is 12 payments per year. Multiply this number by the term of your mortgage to determine how many payments you will make overall. For our example, you will be making 12 payments a year over the course of 30 years, which works out to 360 payments over the course of the mortgage. We will call this number (360) A.
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4
Determine your yearly interest rate. Generally, the shorter the term of your loan, the lower your interest rate will be. For our example, we will be assuming a 6 percent interest rate.
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Using the numbers that you've gathered, calculate your monthly payment.The formula itself is somewhat complicated, so we will break it down into easier steps. You first need to put your interest rate into decimal format. For our example, a 6 percent interest rate is equal to 0.06. Divide this number by 12, which is the rate of interest you'll be paying monthly. This is 0.06/12=0.005, which we will call B. Add 1 to this number, which would give us 1.005. We will call this number C.
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Multiply C to the Ath power, which in our case would be 1.005^360. This gives us 6.0225. We will call this number D.
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Multiply D times B, which in our case would be 6.0225*.005=0.0301. We will call this number E.
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Subtract 1 from number D. In our case, this would be 6.0225-1=5.0225. We will call this number F.
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Divide E by F. In our case, this would be 0.0301/5.0225=0.006. Multiply this number by the size of your mortgage. In our case, this would be $350,000 for the loan, times 0.006. 350,000*0.006=2,100. This is your monthly principle and interest payment: $2,100.
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Calculate your property tax. This will vary widely based on where you live, as property taxes are calculated on the city and/or county level. However, in general, property tax is determined by first calculating the assessed value of the house. The assessed value is the fraction of your house's worth that is taxed. For example, if the assessed value rate is 20 percent, and your house was worth $350,000, the assessed value of your house would be $70,000. If the local real estate tax is 4 percent, then you would owe $2,800 in property taxes annually.
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Calculate how much property insurance you will have to pay, which will affect the underwriting of your loan. Insurance rates will vary widely depending on the value of your house, its location, and who your insurance provider is. However, the average annual property insurance premium in the United States is around $500.
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Tips & Warnings
While some of the neccessary functions may not be available on all calculators, the free calculator that comes with Windows will more than suffice for the calculations you must make. In our example, some quick calculations will show your payments to be $2,100 a month for 360 months, or $756,000 in total. As you only borrowed $350,000, you are paying $406,000 in interest on a 30-year loan.
The yearly interest rate can be very misleading, as shown in our example. While the interest rate was only 6%, the borrower had to pay more than twice the value of the loan over the course of 30 years.
