How Do I Calculate My Mortgage Rate?
Understanding your mortgage rate can help you make better financial decisions while buying a home. Instead of accepting the offer blindly, it’s wise to look at numbers while making this important decision.
If you’re a first-time homebuyer, it’s likely that you don’t know how to calculate the mortgage rates. This rate determines the monthly payments you’ve to pay to your lender.
As such, it is important to find the cheapest rate so you can pay it back easily and in a reasonable time. Here’s the step-by-step guide to calculating your mortgage rate and total monthly payment using a formula:
1. Calculate Your Mortgage Principal
Your mortgage principal is the initial loan amount you receive from your lender. For example, someone with $50,000 cash can make a 20% down payment on a $250,000 home but will need to get a mortgage of $200,000 from the lender to complete the purchase. In this case, the mortgage principal will be $200,000.
You will pay the same amount each month if you have a fixed mortgage rate. More money will go to your principal with each payment and less towards your interest.
2. Calculate Your Monthly Interest Rate
The interest rate is the fee a bank charges you for lending money, expressed in percentage. Commonly, a purchaser with a high down payment, high credit score, and low debt-to-income ratio will get a lower rate because the risk of loaning that individual is lower than it would be for somebody with less stable financial condition.
Lenders decide your annual interest rate depending upon your application. To calculate your monthly mortgage payment, you need the monthly interest rate. Divide your annual interest rate by 12 to find the monthly interest rate. For example, if your annual rate is 3.5%, the monthly interest rate would be 0.291%.
3. Determine Your Number of Payments
The most common mortgage term is a 30-year fixed rate or 15 years. To determine your number of payments, multiply 12 by the number of years of your mortgage term.
A 30-year fixed rate mortgage would require 360 total monthly payments, while a 15-year term would require 180. You only need this figure when using the formula – a mortgage rate calculator would need only your loan type.
4. Figure Out Whether You Need a PMI
You need Private Mortgage Insurance (PMI) if your down payment is less than 20% of the total purchase price when you get a regular mortgage. This is another important figure used while determining your mortgage rate.
The PMI costs between 0.2% to 2% of your mortgage principal, but the exact cost will be given in your loan estimate. Most likely, your PMI amount will be added to your monthly payments by the lender. Usually, the PMI is waived when you reach 20% equity in the home.
5. Consider Property Taxes
A monthly mortgage payment will usually include property taxes collected by your lender and put into an escrow account. These taxes are then paid to the government on the homeowner’s behalf. These property taxes will depend on the value of the home and the local tax rate.
The amount of this tax could be more or less than the actual amount, which could result in a refund come the tax season.
You can typically find your tax rate on the local government website.
Consider the Cost of Homeowners Insurance
Homeowners insurance is another cost baked into the monthly mortgage payments which almost every borrower needs to pay. This insurance usually covers your belongings and offers liability coverage on your property.
There are eight different types of this insurance, and policies with a high deductible will usually have a lower monthly premium.
Calculating Your Monthly Payment
Usually, you can use mortgage payment calculators to determine your mortgage rate. Still, if you want to do the math by hand, you can calculate it, not including taxes and insurance, using the following equation:
M = P[i(1+i)^n]/[(1+i)^n-1]
P = principal loan amount
i = monthly interest rate
n = number of months required to pay off the loan
M = monthly mortgage payment
Once you calculate the monthly mortgage payment (M), you can add in the homeowner’s insurance and local property taxes if you have them. These costs are fixed and are not determined by how much you borrow, so they can easily be added to the final figure.
Now that you’ve learned how to estimate your mortgage rate, you can start your homeownership journey by determining your prequalification.