Buying a House: Learn About What Goes Into Mortgage Payments

Here’s How to Calculate Your Mortgage Payment

While there are many costs associated with owning a home, let’s start with what exactly makes up a large portion of the cost – your mortgage payment.

A mortgage payment is made up of principal (the loan amount borrowed from the lender) and interest (the “cost” of borrowing money from the lender). Note that on top of P&I, the monthly mortgage payment can include other expenses, including property taxes, homeowner’s insurance, and mortgage insurance.

To get an idea of what your mortgage payment could look like, click the icon the lower left-hand side of your screen to plug and play numbers specific to you into the mortgage payment calculator.

How Much Mortgage Can I Afford On My Salary?

Getting into the nitty gritty financial side of the mortgage process doesn’t have to be daunting. While a loan officer can provide concrete information specific to you, you can still guestimate affordability on your own.

The 28/36 Rule

The 28/36 rule is a tool that lenders often use in their credit assessment to gain an understanding of a buyer’s financial status. According to Investopedia, “a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans and credit cards.” While it’s a good rule of thumb for lender when determining their own risk in the event the borrower defaults on their loan, it serves equally to ensure the borrower doesn’t assume insurmountable debt.

Debt-to-Income Ratio (DTI)

Your DTI is your monthly debt divided by your gross monthly income. This is a huge factor that lenders consider when weighing your financial strength and ability to repay the loan.

How to Calculate DTI

Add up your monthly debt payments then divide them by your pre-tax income – it’s that simple!

Factors That Influence Your Mortgage Payment

Loan types influence how much money you’ll be spending on your mortgage each month.

Mortgage Types

Fixed vs. Adjustable-Rate Mortgages:

With a fixed rate, you have the same interest rate for the entire term of your mortgage (typically, 15, 20, or 30 years). With an adjustable rate, the rate changes throughout the life of the loan, and is typically fixed at the lowest for the initial 5-, 7-, or 10-year years of the term.

FHA:

FHA mortgages are government-assisted alternatives to conventional financing and are great options for those who want to put less money down or who have lower credit scores. 

VA:

VA Loans are mortgages available to veterans, active service members, National Guard, reservists, and spouses.

Conventional Loan:

Conventional loans offer low down payment options, competitive interest rates, and generally require a higher credit score.

What Credit Score is Needed to Buy a House?

A lender looks at your credit score and credit history to determine as a factor of consideration when determining your ability to repay the loan. The higher the score, the more options a borrower typically has to choose from. With higher credit, borrowers are usually offered lower interest rates as well.

Loan-to-Value Ratio (LTV)

Another factor lenders consider during the mortgage process is your LTV. LTV ratio is an indicator of your home’s value versus your actual loan amount. This factor can be lowered by buying a home below market value and/or making a larger down payment at purchase. The higher the LTV ratio is, the riskier the investment is for lenders, and therefore the mortgage rate offered will be higher.

Get a personalized Home Purchase rate!

Is Now a Good Time to Buy a House?

Throughout 2020 and well into 2021, mortgage rates have been sitting still at near historical lows. When mortgages rates are low, the housing market experiences a spike in home purchases; after all, financing a home for the lowest price possible is an opportunity most home buyers don’t want to miss. Additionally, now we’re seeing the economy stabilize, and expert predictions are pointing to a full recovery.

The bottom line:

Taking the steps towards buying a home in today’s market may be a smart move for you. Don’t wait to achieve your homeownership dreams. Use our Mortgage Calculator or read more about homebuying with Newrez. Get started today!