Purchasing a home is likely the largest financial investment you’ll make in your lifetime. And for most homebuyers, a mortgage is necessary to finance that dream. But before signing on the dotted line, it’s imperative you understand the ins and outs of mortgage calculations.
At Pilkington Estates, we aim to provide homebuyers with clarity around mortgage costs. This step-by-step guide breaks down the key factors that determine your monthly mortgage payment
- Purchase Price
The purchase price is the negotiated amount you agree to pay for the property. This forms the basis for all subsequent mortgage calculations, so accurately determining the home’s value is critical. Consider comparable in the area and work with an estate agent to establish a competitive offer.
- Down Payment
The down payment is the portion of the purchase price you pay upfront, reducing the amount you must finance with a mortgage loan. Down payments typically range from 5-20% of the purchase price. The larger your down payment, the less you’ll need to borrow.
- Mortgage Term
The mortgage term is the length of time over which you’ll pay back the loan, typically 15 or 30 years. The longer the term, the lower your monthly payments, but the more interest you’ll pay over the life of the loan.
- Interest Rate
Lenders charge an interest rate to compensate for the risk of lending the funds. Interest rates vary based on market conditions, your financial profile, the type of mortgage, and more. Even small rate differences can impact your monthly payment.
- Mortgage Type
Common mortgage types include fixed-rate, adjustable-rate, interest-only, balloon, jumbo, and FHA/VA loans. Each has unique terms that affect monthly payments. Understand the features to choose the optimal type for your situation.
- Calculate the Loan Amount
Subtract your down payment from the purchase price to get your loan amount. For example, if the purchase price is £200,000 and your down payment is 10% (£20,000), your loan amount is £180,000.
- Estimate Principal & Interest
Using a mortgage calculator, input the loan amount, interest rate, and mortgage term to estimate principal and interest payments. Principal is the amount you borrow, interest compensates the lender.
- Add Escrow
Many lenders require escrow accounts to cover property taxes and insurance. Escrow contributions get added to your monthly payment. Expect around 1.5-3% of the home price annually.
- Account for PMI
If your down payment is less than 20%, you’ll likely pay private mortgage insurance (PMI). PMI protects the lender from default risk and gets added to your payment.
- HOA & Other Fees
If the property is part of a homeowners’ association (HOA), account for HOA fees. Also factor in any other applicable fees like application or origination charges.
- Calculate Total Payment
Add together principal, interest, escrow, PMI, and fees to get your estimated total monthly mortgage payment. Plug this into your budget to ensure it’s affordable.
Mortgage calculations certainly aren’t simple, but being an informed buyer is the best way to get clarity on costs. At Pilkington Estates, our team of financial experts is here to walk you through the process and help determine the optimal mortgage solution for your unique financial situation. We’re dedicated to making your homebuying journey straightforward and stress-free. Contact us today to get started!