How to calculate a mortgage payment
Under "Home price," enter the price (if you're buying) or the current value (if you're refinancing). NerdWallet also has a refinancing calculator.
Under "Down payment," enter the amount of your down payment (if you’re buying) or the amount of equity you have (if refinancing). A down payment is the cash you pay upfront for a home, and home equity is the value of the home, minus what you owe.
On desktop, under "Interest rate" (to the right), enter the rate. Under "Loan term," click the plus and minus signs to adjust the length of the mortgage in years.
On mobile devices, tap "Refine Results" to find the field to enter the rate and use the plus and minus signs to select the "Loan term."
You may enter your own figures for property taxes, homeowners insurance and homeowners association fees, if you don’t wish to use NerdWallet’s estimates. Edit these figures by clicking on the amount currently displayed.
The mortgage calculator lets you click "Compare common loan types" to view a comparison of different loan terms. Click "Amortization" to see how the principal balance, principal paid (equity) and total interest paid change year by year. On mobile devices, scroll down to see "Amortization."
» MORE: What is mortgage amortization?
Formula for calculating a mortgage payment
The mortgage payment calculation looks like this: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
The variables are as follows:
M = monthly mortgage payment
P = the principal amount
i = your monthly interest rate. Your lender likely lists interest rates as an annual figure, so you’ll need to divide by 12, for each month of the year. So, if your rate is 5%, then the monthly rate will look like this: 0.05/12 = 0.004167.
n = the number of payments over the life of the loan. If you take out a 30-year fixed rate mortgage, this means: n = 30 years x 12 months per year, or 360 payments.
How a mortgage calculator helps you
Determining what your monthly house payment will be is an important part of figuring out how much house you can afford. That monthly payment is likely to be the biggest part of your cost of living.
Using NerdWallet’s mortgage calculator lets you estimate your mortgage payment when you buy a home or refinance. You can change loan details in the calculator to run scenarios. The calculator can help you decide:
The home loan term length that’s right for you. 30-year fixed-rate mortgage lower your monthly payment, but you’ll pay more interest over the life of the loan. A 15-year fixed-rate mortgage reduce the total interest you'll pay, but your monthly payment will be higher. c
If an ARM is a good option. Adjustable-rate mortgages start with a "teaser" interest rate, and then the loan rate changes — higher or lower — over time. A 5/1 ARM can be a good choice, particularly if you plan on being in a home for just a few years. You’ll want to be aware of how much your monthly mortgage payment can change when the introductory rate expires, especially if interest rates are trending higher.
If you’re buying too much home. The mortgage payment calculator can give you a reality check on how much you can expect to pay each month, especially when considering all the costs, including taxes, insurance and private mortgage insurance.
If you’re putting enough money down. With minimum down payments commonly as low as 3%, it's easier than ever to put just a little money down. The mortgage payment calculator can help you decide what the best down payment may be for you.
How lenders decide how much you can afford to borrow
Mortgage lenders are required to assess your ability to repay the amount you want to borrow. A lot of factors go into that assessment, and the main one is debt-to-income ratio.
Your debt-to-income ratio is the percentage of pretax income that goes toward monthly debt payments, including the mortgage, car payments, student loans, minimum credit card payments and child support. Lenders look most favorably on debt-to-income ratios of 36% or less — or a maximum of $1,800 a month on an income of $5,000 a month before taxes.
» MORE: Calculate your debt-to-income ratio
Typical costs included in a mortgage payment
If your mortgage payment included just principal and interest, you could use a bare-bones mortgage calculator. But most mortgage payments include other charges as well. Here are the key components of the monthly mortgage payment:
Principal: This is the amount you borrow. Each mortgage payment reduces the principal you owe.
Interest: What the lender charges you to lend you the money. Interest rates are expressed as an annual percentage.
Property taxes: The annual tax assessed by a government authority on your home and land. You pay about one-twelfth of your annual tax bill with each mortgage payment, and the servicer saves them in an escrow account. When the taxes are due, the loan servicer pays them.
Homeowners insurance: Your policy covers damage and financial losses from fire, storms, theft, a tree falling on your house and other bad things. As with property taxes, you pay roughly one-twelfth of your annual premium each month, and the servicer pays the bill when it's due.
Mortgage insurance: If your down payment is less than 20% of the home’s purchase price, you’ll likely pay mortgage insurance. It protects the lender’s interest in case a borrower defaults on a mortgage. Once the equity in your property increases to 20%, the mortgage insurance is canceled, unless you have an FHA loan backed by the Federal Housing Administration.
Typically, when you belong to a homeowners association, the dues are billed directly, and it's not added to the monthly mortgage payment. Because HOA dues can be easy to forget, they're included in NerdWallet's mortgage calculator.
Reducing monthly mortgage payments
The mortgage calculator lets you test scenarios to see how you can reduce the monthly payments:
Extend the term (the number of years it will take to pay off the loan). With a longer term, your payment will be lower but you’ll pay more interest over the years. Review your amortization schedule to see the impact of extending your loan.
Buy less house. Taking out a smaller loan means a smaller monthly mortgage payment.
Avoid paying PMI. With a down payment of 20% or more, you won’t have to pay private mortgage insurance. Similarly, keeping at least 20% equity in the home lets you avoid PMI when you refinance.
Get a lower interest rate. Making a larger down payment can not only let you avoid PMI, but reduce your interest rate, too. That means a lower monthly mortgage payment.
Monthly mortgage payments can go up
Your monthly payment can go up over time if:
Property taxes or homeowners insurance premiums rise. These costs are included in most mortgage payments.
You incur a late payment fee from your mortgage loan servicer.
You have an adjustable-rate mortgage and the rate rises at the adjustment period.
Introducing Mortgage Payment Calculation
To calculate a mortgage payment, you'll need to consider several factors, including the home price, down payment, interest rate, loan term, property taxes, homeowners insurance, and homeowners association fees. Let's break down each concept and explain how they contribute to the mortgage payment calculation.
Home Price and Down Payment
The home price refers to the cost of the property you're buying or the current value if you're refinancing. On the other hand, the down payment is the cash you pay upfront when buying a home or the amount of equity you have when refinancing. The down payment reduces the principal amount of the loan and affects the mortgage payment amount.
Interest Rate and Loan Term
The interest rate is the cost of borrowing money from the lender. It is usually expressed as an annual figure, but for the mortgage payment calculation, you'll need to divide it by 12 to get the monthly rate. The loan term refers to the length of the mortgage in years. For example, a 30-year fixed-rate mortgage has a loan term of 30 years or 360 payments.
Property Taxes, Homeowners Insurance, and HOA Fees
In addition to the principal and interest, a mortgage payment typically includes other charges such as property taxes, homeowners insurance, and homeowners association (HOA) fees. Property taxes are annual taxes assessed by the government on your home and land. Homeowners insurance covers damage and financial losses from various events. HOA fees are billed separately but can be included in the monthly mortgage payment for convenience.
Mortgage Payment Calculation Formula
The mortgage payment calculation formula is as follows:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
- M represents the monthly mortgage payment.
- P is the principal amount, which is the amount you borrow.
- i is the monthly interest rate. To convert the annual interest rate to a monthly rate, divide it by 12.
- n is the number of payments over the life of the loan. For example, for a 30-year fixed-rate mortgage, n would be 360 payments (30 years x 12 months).
How a Mortgage Calculator Helps
Using a mortgage calculator, such as the one provided by NerdWallet, can help you estimate your mortgage payment and make informed decisions. Here are some ways a mortgage calculator can assist you:
-
Determining the Home Loan Term: A mortgage calculator allows you to compare different loan terms, such as a 30-year fixed-rate mortgage or a 15-year fixed-rate mortgage. You can see how the term affects your monthly payment and the total interest paid over the life of the loan.
-
Exploring Adjustable-Rate Mortgages (ARMs): An ARM starts with a lower "teaser" interest rate and adjusts over time. A mortgage calculator can help you assess whether an ARM is a suitable option for your financial situation.
-
Assessing Affordability: By inputting your own figures for property taxes, homeowners insurance, and HOA fees, you can get a more accurate estimate of your monthly payment and determine if you can comfortably afford a particular home.
-
Evaluating Down Payment Options: A mortgage calculator can help you understand how different down payment amounts affect your monthly payment and overall costs. For example, a larger down payment can help you avoid private mortgage insurance (PMI) and potentially reduce your interest rate.
How Lenders Assess Borrowing Capacity
Mortgage lenders assess your ability to repay the loan by considering various factors, with the debt-to-income ratio being a crucial one. This ratio represents the percentage of your pretax income that goes toward monthly debt payments, including the mortgage, car payments, student loans, credit card payments, and child support. Lenders generally prefer debt-to-income ratios of 36% or less.
Typical Costs Included in a Mortgage Payment
A mortgage payment typically includes several components:
-
Principal: This is the amount you borrow, and each mortgage payment reduces the principal you owe.
-
Interest: The lender charges interest for lending you the money. Interest rates are expressed as an annual percentage.
-
Property Taxes: These are annual taxes assessed by the government on your home and land. A portion of your monthly mortgage payment goes toward property taxes, which are saved in an escrow account.
-
Homeowners Insurance: This insurance policy covers damage and financial losses from various events. Like property taxes, you pay a portion of your annual premium with each mortgage payment.
-
Mortgage Insurance: If your down payment is less than 20% of the home's purchase price, you'll likely pay mortgage insurance. It protects the lender in case of default. Once your equity reaches 20%, mortgage insurance is typically canceled.
-
HOA Fees: If you belong to a homeowners association, the dues are usually billed separately and not included in the monthly mortgage payment.
Reducing Monthly Mortgage Payments
If you want to reduce your monthly mortgage payments, consider the following options:
-
Extend the Loan Term: By extending the loan term, you can lower your monthly payment. However, keep in mind that you'll pay more interest over the years.
-
Buy a Less Expensive Home: Taking out a smaller loan means a smaller monthly mortgage payment.
-
Avoid Private Mortgage Insurance (PMI): Making a larger down payment can help you avoid PMI, which can reduce your monthly payment.
-
Secure a Lower Interest Rate: A larger down payment can also help you secure a lower interest rate, resulting in a lower monthly payment.
Conclusion
Calculating a mortgage payment involves considering various factors such as the home price, down payment, interest rate, loan term, property taxes, homeowners insurance, and HOA fees. Using a mortgage calculator can help you estimate your monthly payment and make informed decisions about your home purchase or refinance. Remember to consider your financial situation and choose a mortgage option that aligns with your long-term goals.