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How is My Mortgage Calculated?

  • Written on August 30, 2021 By Stanley Martin

Did you know that approximately 44%of homeowners have a mortgage? This means that almost half of consumers make a monthly payment to their mortgage lender. If you’re on the market for your dream home, you may be focused on the perfect design, the best neighborhood and top-of-the-line smart features, but it’s important to also consider your mortgage and how it’s calculated.

First, let’s explore a few key terms.

  1. Mortgage: The term refers to a loan used to purchase a home, land or other types of real estate where the buyer agrees to pay the lender over time. Basically, a mortgage is an agreement between the consumer and the lender, using the property as collateral to secure the loan.
  2. Lender: A mortgage lender is a financial institution that loans a certain amount of money with the condition that it needs to be repaid within a predetermined time. There are various types of companies that can offer lending options, including conventional banks, credit unions, non-bank mortgage lender and mortgage brokers.
  3. Mortgage Escrow: This term refers to funds or property being held by a neutral third party in real estate transactions. An escrow account holds the funds managed by a middleman until the contract is fulfilled.

Now that we have a better understanding of the mortgage industry terminology, let’s dig into how your mortgage is calculated. Don’t worry, you’re only making one lump payment each month, but there are a few things that are factored into your mortgage in addition to the cost of repaying the loan.

  1. Mortgage Principal: The initial loan amount of your home is called the mortgage principal. For example, if you had $100,000 in cash to make a 20% down payment on a $500,000 home, you would borrow $400,000 from the bank to complete the purchase. Your mortgage principal in this scenario would be $400,000.
  2. Monthly Interest Rate: The bank charges a fee to borrow money, which is shown as an interest rate percentage. A higher credit score, higher down payment and low debt-to-income ratio will typically result in a lower annual interest rate. To calculate what this adds to your monthly payment, divide the annual interest rate by 12.
  3. Private Mortgage Insurance (PMI): If you put down less than 20% of the home’s purchase price, PMI is required. It’s common for this monthly premium to be added to your monthly mortgage payment. This usually costs between 0.2% and 2% of your mortgage principal, and some loans allow you to cancel your PMI after reaching 20% equity stake.
  4. Property Taxes: Your monthly mortgage payment may also include property taxes, which are typically based on your home’s location and value. These taxes are collected by your lender, held in a specific account and paid to the government at the end of the year.
  5. Homeowners Insurance: Another cost that’s bundled into your monthly mortgage payment is homeowners insurance, which protects your house by providing coverage to repair or rebuild after damaging events.

Now that you understand the basics of a home mortgage and your monthly payment, you can focus on finding your dream home that perfectly aligns with your lifestyle and budget. Our team here at Stanley Martin Homes is here to guide you in the homebuying process. You can even use our mortgage and payment calculator to get an estimate of your mortgage payment.