Mortgage Payments: How Are They Calculated?

Mortgage Payments are Variable

As you can see, a lot goes into a monthly mortgage payment. Because of this, monthly payments vary greatly. Your loan balance, your interest rate, your homeowners insurance policy, and where you buy a home can all play a role in what you pay for your mortgage, as well as what you can afford as a homebuyer.Let’s look at each of these factors, as well as how they’ll impact your mortgage payment:
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● Loan amount: The more you borrow to buy your home, the more your monthly payment will likely be.
● Length of your loan: Longer-term loans spread your payments out over more months. If you have a longer-term loan (say, 30 years), you’ll usually pay less per month than with a shorter-term one (15 years, for example).
● Your homeowners insurance policy: If your insurance premium is lumped into your mortgage payment, the size of your annual premium will play a role in your monthly costs, too.
● The type of loan you take out: Some mortgage loans require what’s called mortgage insurance. If you have a loan of this sort, you’ll pay a fee as part of your monthly payment.
● The location of your house: Every city and county has different property tax rates, so if your taxes are rolled into your payments, the exact location of your home will matter as well.Mortgage payments are flexible, and changing just one factor — like the length of your loan or the location where you buy your house — can have a major impact on what you’ll pay monthly to own your home.

Ways to Lower Your Payment

If you know you can’t afford a huge monthly payment, that doesn’t mean homeownership is out of reach. There are several strategies you can use to ensure your payment is both manageable and affordable.
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Improve Your Credit Score

Your credit score directly impacts what mortgage rates you qualify for. A higher score usually means a lower rate, which also helps lower your monthly payment. A lower score does the opposite, sending your rate (and probably your payment) higher.

If buying a home is on your radar, you’ll want to pull your credit report and your score well before starting the search. If your score is low (850 is perfect), then take some time to improve it. Pay down some of your loans and debts, settle any late payments or overdue accounts, and ask if your landlord can start reporting your rent to credit bureaus. This can help improve your score over time.

‍Here at Lower, you can get your rate without it impacting your credit. We use a soft credit pull at first, and save the hard credit pull for when you’re ready to buy. To get your rate, just give us a shout.
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Increase Your Down Payment

If you can put more down up front, it can also help lower your monthly payment. For one, a lower down payment means you’ll need to borrow less — and that equates to a lower balance, less interest, and a lower monthly payment.

A bigger down payment might also help you snag a lower interest rate and, depending on what type of loan you have, it could also mean avoiding private mortgage insurance — yet another way to save on that monthly payment.

Consider Local Taxes

Property taxes vary widely depending on what city, county, and school district your house is in, as well as what water districts and other utility providers serve the area. Knowing your property taxes is important to calculating an accurate monthly payment. You can usually find property rate data on a home’s listing on Zillow or Trulia, but if not, your real estate agent should be able to help here, too.

Stretch Loan Term

When you get a longer-term mortgage loan, you spread your balance over more time — and that means lower monthly payments. This is typically why homebuyers choose 30-year loans when purchasing their first house, as it helps minimize their monthly costs while they ease into being a homeowner.

Just keep in mind here: Longer-term loans also come with more in interest costs. For example, a 30-year, $200,000 loan at a 3.5% means paying $123,312 in interest over the life of the mortgage. A 15-year loan with the same terms? Interest costs drop to just $57,357. While the monthly costs are lower on the first loan, total interest costs are much higher over time. It’s all about finding a monthly payment that works for you.

Consider an Adjustable Rate Mortgage (ARM)

Adjustable-rate mortgages have interest rates that fluctuate. They usually start off with a really low rate, but that rate can increase later on (usually five, seven, or 10 years down the line). If you know you’ll only be in your home a short amount of time, you might be able to enjoy that low rate before it increases. That means a lower monthly payment and less paid in interest to boot.If you’re searching for a forever home, an adjustable-rate loan can still be a smart option. You will just want to refinance your loan before your rate can increase.

A Mortgage is Within Reach

Mortgages are based on many, many factors, and there are dozens of ways you can reduce your payment and make sure it’s within your means. If you’re not sure a mortgage payment is doable with your current income or budget, be sure to get in touch with our team here at Lower. We’ll shed light on what options you might have and point you toward a loan solution that can minimize your costs as a homebuyer.