Figuring the monthly payment on a mortgage

Last update: Feb. 5, 2014

If you came to this page first, you should use the calculator for how much home you can afford before you try to figure your monthly payment here.

 ← Back: How much home can you afford?Next: The Down Payment → 

Your monthly payment includes more than just the repayment on the loan!  It also includes property taxes and insurance, and if your down payment was less than 20%, then it also includes private mortgage insurance.  Many mortgage calculators don't include these amounts, which makes them kind of useless.  My calculator (at right) gives you a more realistic picture of your real total monthly obligation.

For the down payment, enter the largest that you're able to afford.

To show how much the interest rate and the down payment affect the monthly payment, here are some examples of monthly payments on a $180,000 home with a 30-year mortgage:

1. 4% interest, 20% down:   $987/month
   
2. 4% interest, 5% down:   $1230/month
   
3. 8% interest, 20% down: $1357/month
4. 8% interest, 5% down:   $1669/month
   
   

Taxes, Insurance, and Maintenance

When you own a house, you have three new expenses that you didn't have when renting: 

1. Property Tax (collected by your local government).
2. Fire/Hazard Insurance (with insurance premiums payable to your insurance agent).
3. Maintenance on your home.

To make it easier to pay for the first two, your lender provides a service called escrow.  Your monthly mortgage payment includes amounts for taxes and insurance, which the bank holds for you, and then once a year they send the taxes to the tax assessor, and the insurance premium to your insurance agent.  This service is free.  It's convenient because it spreads the big annual cost over twelve monthly payments, and because the bank takes care of the transactions for you.

But you don't have to use the escrow service if you don't want to.  If you prefer to pay your taxes and insurance separately from your mortgage payment, you're certainly welcome to do so.  Just let your bank know that's what you want to do.

Property taxes

Property tax rates vary widely from county to county  It's worth finding the actual amount on the home you want to buy, so you can better estimate your total monthly payments.  Most local governments let you see the tax amount for a given property on their website, and here's a county-by-county list of U.S. property tax rates.  If you can't find the tax for the house yourself, your lender or real estate agent can look it up for you.

Property taxes are generally paid at the end of the year, for the previous year.  So in Dec. 2013 or Jan. 2014 you'll pay taxes for 2013.

Property taxes are a little tricky at closing, and we'll cover that when you get to the closing costs lesson.  You can wait until then to learn about that.

Insurance

If you've never purchased insurance before, it's not hard.  Get quotes from two or three agents and compare.  If you already have insurance for a car, one of your quotes should come from the same agent, since you usually get a discount by having both car and homeowners insurance with the same company.  To find other agents, just do an web search for "homeowners insurance".

Thankfully, states have mandated that insurance policies be standardized because there's so much fine print you could never compare them easily otherwise.  The main variables you'll choose are:

1. The amount of coverage.  Typically, this should be the amount it would cost to replace your house if it burned to the ground.  This amount is often less than you paid for your home, because you also bought the land the home is on.  Naturally, you typically don't insure the land, since it can't burn down.
   
   

Insurance Deductible vs. Premium
Deductible	Premium
1% ($1333)	$1333
3% ($4890)	$961
5% ($8150)	$784

2. The deductible.  This is how much you have to pay out-of-pocket before your insurance kicks in.  The lower the deductible, the higher your insurance premium.  ("Premium" is just a fancy word for the amount you pay for insurance.)  For example, at right is the deductible vs. premium for a policy covering $163,000 of replacement value.  Personally, I carry a 5% deductible on my own home, and am prepared to be on the hook for the first 5% of losses if something happens to my home.
   
   
3. The perils you want covered.  In insurance terms, a "peril" is something that costs you money, such as fire, a tree falling on your house, or burglary.  All policies cover those, but most don't cover floods, unless you pay for a flood insurance add-on.
   
   

Maintenance

While maintenance is a very real expense, it's not included in your monthly payment, so you'll need to prepared to pay for maintenance separately.  Long-term maintenance often runs around 1% of the home value per year, so on a $175,000 home, figure $1750 per year (going up each year with inflation).  If that sounds like a lot, consider that every 15 years or so you'll need to replace your roof, which will cost several thousand dollars.  (You could get a metal roof which will last your lifetime, like I did, but metal roofs cost more up front.)  And every several years you'll have to have a wood home repainted, which will run a few thousand dollars.  Central heat/air systems don't last forever, either.

If you have decent savings, you don't have to budget for maintenance.  But if buying the home is going to be a stretch for you and you're not good at saving, then try to put some money away each month in a separate account so you'll be able to pay for maintenance as needed.  A good amount is the value of your home divided by 1200.  (e.g., on a $180,000 home, that would be $150/mo.)

The rest of this page shows you how to calculate the mortgage payment manually with spreadsheet software (Excel, Numbers, etc.).  If this doesn't interest you, feel free to skip to the Down Payments page.

Figuring the payments on a loan

Here's how to use a spreadsheet program to figure out the payments on a loan.  Open up your trusty spreadsheet software and type the following into any cell:

=PMT(A%/12,B,C)  (If you're using Libre Office, use semicolons instead of commas.)

But instead of typing the letters A, B, and C, use these figures instead:

A = Enter the interest rate of the loan. Note that the formula divides it by 12 because you want the monthly interest rate, not the yearly interest rate.

B = Enter the number of months you'll be making mortgage payments.  That's 180 for a 15-year loan, or 360 for a 30-year loan.

C = Enter the amount of the loan. This is the price of the house, minus the down payment, plus closing costs (if you're rolling the closing costs into the loan).

Note that the result is a negative number. Don't worry about that. If it bothers you, put a minus sign between the = sign and "PMT".

Here's an example. Let's say our home costs $140,000. We're putting 5% down ($7,000), so we'll only need to borrow $133,000. But we're rolling the closing costs ($6,000) into the mortgage, which takes it back up to $139,000. Our interest rate is 8% and it's a 30-year loan. So we've got:

     =-PMT(8%/12,360,139000)  (If you're using OpenOffice, use semicolons instead of commas.)

And our answer is $1020 a month.  Don't forget that your mortgage payment also includes taxes and insurance. (See that section above.)  Let's say that taxes are $2500/year and insurance is $1100/year. That's $3600/year together, or $300/month. So your total monthly mortgage payment is $1320 ($1020 from what we figured earlier, plus $300 for taxes and insurance.)

One more thing: If you put less than 20% down, you'll probably have to pay for Private Mortgage Insurance (PMI). PMI generally costs about 1/3700th to 1/1500th the price of the home. (On a $120,000 home, you'll pay $32 to $80/mo. for PMI).

Using this formula to pay off a loan early

You can use this formula to figure out how much you have to pay in order to pay your loan off early. For example, let's say you're five years into a 30-year mortgage, and you want to pay the loan off in another 13 years instead of another 25. Just enter in the principal remaining on your loan (should be listed in your coupon book or on your mortgage statement), and use the number of months you want to pay it off in (in this case, 13 years x 12 months/year = 156 months).

=PMT(8%/12,156,80000)    (If you're using OpenOffice, use semicolons instead of commas.)

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