How to Calculate Mortgage With Insurance & Taxes

Include taxes and insurance costs when setting a housing budget.

It is important for prospective home buyers to carefully consider how much a home will cost before communicating an offer to a seller or entering into a home sales contract. Often, buyers only consider the mortgage amount when deciding what they can and cannot afford. Unfortunately, local property taxes and insurance can add several hundred dollars to your monthly home expenses. For families and individuals that overextend themselves by taking on too large of a mortgage, these additional monthly expenses could send them into foreclosure.

Instructions

Calculate your monthly mortgage payment.

1. Write down the amount of your loan, the length of your loan in terms of months, and your annual interest rate. These are the terms that you must know in order to determine your monthly mortgage payment. The amount of your loan will be the agreed upon price for the home minus your down payment. Your loan length is the amount of time that you will be paying on the loan. Most loans have either 15-year (180 months) or 30-year (360 months) repayment terms. The interest rate on your loan is the amount that you are charged each year for borrowing your mortgage from your lender. Common mortgage interest rates are 4 percent to 6 percent a year. You may use these estimates in your calculation if you have not yet applied for and been approved for a mortgage.

2. Determine your monthly interest rate by dividing your annual interest rate by 12. For example, if your annual interest rate is 6 percent (.06/12), your monthly interest rate will be .005. Add 1 to the monthly interest rate (1+.005= 1.005). Multiply this sum by the number of months equal to your loan repayment term (1.005 x 360 = 361.8). Multiply this product to the principal amount of your loan. For example, if you took out a $250,000 mortgage, you equation would be $250,000 x 361.8 = 90,450,000. Multiply this product by your monthly mortgage amount (90,450,000 x .005 = 452,250). Assign the term "A" to this final product.

3. Add 1 to our monthly interest rate (1 + .005 = 1.005). Multiply this product by the length of your loan in months (1.005 x 360 = 361.8). Subtract 1 from this product (361.8 -- 1= 360.8). Assign a label of "B" to this difference.

4. Divide "A" by "B". For example, the number assigned to "A" above was 452,250. The number assigned to "B" was 360.8. Dividing 452,250 by 360.8 will produce a quotient of $1,253.50. This quotient represents the monthly payment on a $250,000 mortgage with a 30-year repayment term and a 6 percent annual interest rate.

Adding Taxes and Insurance

1. Contact your local tax adjustment or collector's bureau in your city, town or municipality. Ask for the past year's property tax rate for the address of the home that you are interested in purchasing. Divide this number by 12. For example, if the annual property taxes on your home are $6,000, you will end up paying $500 each month in taxes.

2. Estimate your annual insurance premium rate. According to Home Insurance.com, the average annual premium for homeowner's insurance across the country is approximately $675. Divide this amount by 12 to determine how much you will pay each month for insurance ($675/12) and you get a quotient of $56.25 per month.

3. Add the monthly cost of your mortgage payment to your monthly tax and insurance costs. Following the example from above, our monthly mortgage payment was $1,253.50. The cost of taxes and insurance per month is $556.25, for a total monthly expense of $1,809.75.

References

• Money Chimp.com: Mortgage Formula
• Home Insurance.com: Average Home Owner's Insurance Rates