Buyers often come to me and say that they want to keep their monthly mortgage payment below a certain amount. It’s typically some amount over what they are currently paying in rent. For every house they will ask me, “What’s my estimated monthly payment?” I like to teach people this simple trick so when looking online, they can determine if they should be considering a property.
Here’s the trick…
At an interest rate of 6% (which is right about where mortgage rates are right now), every $100,000 in mortgaged money equates to approximately $600 a month for the principle and interest portion of a mortgage. Correspondingly, every $10,000 in mortgaged money equates to approximately an additional $60 a month.
Remember, your monthly mortgage payment is comprised of 4 things; principle, interest, taxes, and insurance.
So, if you were to mortgage $210,000 for a home, the principle and interest portion of the monthly payment would be approximately $1,260. You then need to take the estimated yearly tax amount, divide it by 12, and add it to the $1,260. Additionally, you need to take the estimated yearly insurance amount, divide it by 12, and add it to the $1,260. And there you have your approximate monthly mortgage cost.
One difficulty buyers have a hard time accepting is that taxes can sometimes account for 25-30% of the monthly payment allowance and they’re not really taking that into account. They think they can “get more house” because they’ve used an online mortgage calculator that ignores taxes and insurance. It’s frustrating to them (and to me), as I have to explain that if they want a monthly payment of $X, they either have to look in a lower price range, or readjust their monthly payment allowance.
Another catch is Private Mortgage Insurance, or PMI. If you’re not putting 20% down with the purchase, you will more than likely have to pay a monthly PMI fee. As a buyer, you should speak with your lender about PMI because the monthly amount will vary based on the buyer’s profile and the price of the house. This will be added to your monthly payment allowance though, and it is commonly overlooked.