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How to Calculate a Mortgage Payment

Buying a new home is probably the single largest expenditure most people make in their lifetime. It’s thrilling, but it can also be stressful. A good place to begin is to consult an online mortgage calculator to see how much home you can actually afford. Other important considerations include having a good to excellent credit score and a healthy debt-to-income ratio (DTI). Both indicators provide lenders with a picture of whether you’re a good lending risk and how much you’ll be able to afford to borrow — and comfortably pay back.

Person hitting buttons on a calculator in front of a small wooden model of a home

Only the lucky few have the capacity to pay the entire home price in cash outright. For everyone else, buying a home means making a down payment, then borrowing the rest from a lender. The loan amount, along with other required payments, then gets bundled into what’s known as a mortgage. In the more common fixed-rate mortgage, payments are divided up into equal amounts that you pay each month until your mortgage is paid off. Borrowers can choose varying lengths of home loans, typically anywhere from 10 to 30 years.

How a Mortgage Payment Is Structured

The acronym you’re going to be hearing a lot as you engage in your home search is PITI. Most monthly mortgage bill amounts are based on a combination of PITI which stands for principal, interest, taxes, and insurance.  Here’s what each of these means for your mortgage payment:
Principal This is the amount you borrow from the lender and must pay back. Each time you make a monthly mortgage payment, you reduce your principal.
Interest This is the amount the lender charges to lend you the money. As you amortize (pay off) a fixed-rate mortgage, the interest rate won’t change, but the amount you'll pay toward the principal and interest will change. As you pay down your principal, you’ll pay less in interest.
Taxes — These are the annual taxes assessed for the property you want to buy. Tax amounts are set by the county or city government, and the annual amount is divided into 12 equal parts and added to your mortgage payment amount as part of an escrow account.
Insurance — Homeowners insurance is commonly part of a mortgage payment escrow account, and like taxes, the annual premium gets divided into 12 equal parts.
If your down payment is less than 20%, your lender may also require you to have private mortgage insurance (PMI) in case you default on your loan. Once you’ve paid into your mortgage enough to build up equity above 20%, the mortgage insurance is typically canceled.

Here’s How to Calculate a Mortgage Payment

Homeownership is a big responsibility, so heed the advice from those who have been there: Before you hit the open house circuit, take a step back and get a handle on how much house you can afford, or more accurately, what a comfortable monthly mortgage payment would be.

First National Bank and Trust’s Mortgage Calculator tool can help you figure out how to: 

  • Choose the optimum loan term for your home loan — A 30-year fixed-rate mortgage will lower your monthly payments, but you’ll end up paying more in interest over the life of your loan. In contrast, a 15-year fixed-rate mortgage will reduce the overall amount of interest you pay, but your monthly payments will be higher.
  • Determine how much money you should put down — Use the mortgage calculator to figure out what the best down payment is for your budget and how it will impact your insurance costs and your chances to qualify for a home loan.
  • Recognize whether you’re trying to buy too much house — You may be surprised at what the payment calculator reveals when it comes to your monthly payment. It could be much more or even less than you imagined. In any case, with the mortgage calculator, you’ll get a quick picture of how much house you can (or can’t) afford right now. If you can’t quite attain the home of your dreams, you may need to focus on increasing your savings for the time being, or reassess the must-haves you’re looking for in a home and scale back.

A Hidden Home Cost to Keep in Mind …

With any home you’re considering, it’s important to check to see if your community has a homeowners association (commonly referred to as an “HOA”). If it does, you may be required to pay HOA fees on a yearly, quarterly or monthly basis for community amenities (like a pool or fitness room) and/or for community services (like garbage pickup, lawn maintenance, snow removal), often called “HOA fees.” These are not negotiable and you should also be aware that these fees often increase through the years.

What to Do If a Mortgage Is More than You Can Handle

All is not lost. There are four ways to potentially reduce your monthly mortgage payments that can help if you find a home you adore but it’s just out of your reach financially, or focus on what you can realistically afford:
  1. Explore a term extension — Choosing a mortgage with a longer term will reduce your monthly payments (though you’ll pay more interest throughout the life of your loan). It’s an option worth investigating with your loan officer and real estate agent.
  1. Eliminate private mortgage insurance (PMI) — If you can swing a down payment of 20% or more on a home you’re buying, you won’t be required to take out private mortgage insurance.
  1. Secure a lower interest rate — The interest you pay on the principal balance of the loan will be lower, resulting in a lower monthly payment
  1. Focus on finding a less expensive home — Of course, the simplest solution is to buy a lower priced home, so you can take out a smaller loan and in turn make lower monthly mortgage payments.
Ready to see if any of these payment-reducing solutions might work for you? Head over to First National Bank and Trust’s Mortgage Calculator tool to test a few “what-if’s” right now.

Let Us Help Make Your Home Dreams Come True

The team at First National Bank and Trust knows their way around affordable mortgage options. We can work with you to help you understand how much home you can afford and prequalify you for a home loan to make shopping for a new home easier. Have questions? We’re available to chat by phone at 1-800-667-4401, or you can contact us online via our message form options. You're also welcome to visit one of our convenient locations in Southern Wisconsin and Northern Illinois.