We love online mortgage calculators as a first step when home shopping. You plug in the mortgage amount, the interest rate percentage, and the length of the loan. With just a few clicks you have a mortgage payment calculated! Great news. Now you're ready to figure out what you can afford and start shopping.
But hold on a moment—that amount is only part of your monthly payment. Your mortgage typically includes other additional expenses that you definitely need to account for before you set your budget. Here's how a typical monthly mortgage payment breaks down:
Very simply, the principal part of your payment is the money you borrowed and have agreed to pay back. If your mortgage is for $250,000, you will pay back that original $250,000 over the life of the loan.
When you commit to a mortgage, you lock an interest rate—this is the annual rate of interest charged by your lender in return for providing you a loan. The interest is then divided by 12, for each month, and applied to your loan for your monthly mortgage payment. So in our example of a $250,000 loan, let's say it's a 30 year fixed rate at 4% interest. Over the life of that loan, you will pay the lender back $429,624 total. So your monthly rate is calculated to help you pay off both the original amount of the loan and the interest.
But that's not all that may be included in your actual monthly payment.
Lenders will often roll your local property taxes into your monthly payment for ease. This amount varies each year based on your local tax rates and your home's assessed value. Lenders will calculate this amount and divide it by 12, and collect that money (in addition to your principal and interest) which they will place in an escrow account, which is a separate fund set up for you. Each year, both you and your lender will receive an annual notice from your county about your due taxes, and the lender will then make the payment from your escrow account on your behalf.
Some lenders require you to pay your homeowner's insurance as part of your monthly mortgage payment, particularly if you have an FHA loan or put less than a 20% down payment on your home at purchase. This protects the lender in case something happens to your home, like a fire or flood, to decrease its value before you have paid it off. Although you choose your insurance carrier, the lender will again collect the funds from you in your monthly mortgage payment, keep them in escrow, and pay your insurer for you.
Private Mortgage Insurance
If you're a first-time homeowner with a small down payment (less than 20%), you may be required to carry something called private mortgage insurance, or PMI. PMI is calculated between .5% and 1% of the cost of the mortgage and paid monthly to the lender. The good news? PMI can go away once you've paid back a certain amount of your original loan.
Want to figure out what your REAL monthly payment might be? Lennar's monthly mortgage calculator goes the extra step of helping our clients anticipate and budget for additional monthly expenses such as escrow and insurance.