Many people (including me back in the day) believe a mortgage payment to be one payment to a bank for a loan on a house or other real estate holdings. The fact is, your mortgage payment is actually made up of four payments, bundled into one payment… into an escrow account. Let’s dig into what exactly makes up a mortgage payment so you can be better prepared to afford a home.
The first of the four payments in a mortgage is that which most people think it is, the payment for the loan amount. There are many types and term lengths for a real estate loan, but as real estate brokers, the easiest way we calculate this number is by assuming the borrower will be taking out a fixed interest rate for the most common time period of 30 years. We call this a “30-year fixed” loan. If there are 12 monthly payments in a year, and you pay the loan off over 30 years, then there will be 360 payments. Take your loan amount (not the price you are paying for the home unless you are putting $0 down. E.g. if a house costs $450,000 and you are putting $50,000 down, your loan is only $400,000) and divide that number by 360 payments. In the example given in this paragraph, a $400,000 loan divided by 360 is $1,111.11 per monthly payment.
The second payment that makes up your mortgage payment is the interest you pay on your loan. For example, if your interest rate is 6.0%, and your loan amount is $400,000, then you will be paying 106% of your loan amount over your 360 payments. That number, for this example, would be $424,000. So that means the lender or bank is making $24,000 over 30 years to lend you the $400,000. To find your monthly payment for your mortgage we take the $24,000 and divide it by 360. That would be $66.66, added to the $1,111.11.
The third payment for a mortgage payment are the property taxes. Property taxes vary wildly for every property. In the Portland Metro Area, the highest property taxes have long been in Multnomah County, because voters decided many years ago to support the schools and arts through increase property taxes. If you buy a house in Washington Count or Clackamas County, there is a very good chance your taxes will be less (assuming we are comparing homes of the same size and value of course). There is a very general rule of thumb that says property taxes make up about 1% of a property’s value, but that is very general and often inaccurate. Luckily today we have several websites that will tell you the taxes of homes (as it is public information) so you don’t have to guess. For our numbers today, let’s assume the 1% rule and say the $450,000 home you are buying has property taxes of $4,500 per year. If we divide that number by 12 months, we come to another $375 per month added to the $1,177.77.
The fourth payment in a mortgage payment is from the property insurance. Property insurance is something that is generally required by lenders to protect their investment. Like property taxes, it is better to know what the cost is exactly rather than ball-park it, but generally I’ve found over the years that property insurance runs about $700-800 per year depending on the size of property. I personally pay about $770 if I remember correctly. So to be conservative, let’s use $800 divided by 12 for our last monthly cost. That number is $66.66 again.
So in review, when you are looking at a home to purchase and are wondering if you can afford the monthly mortgage payment, you will want to look at all four of these numbers:
$400,000 Loan Amount Example
Loan Principal Payment = $1,111.11 per month
Loan Interest Payment = $66.66 per month
Property Taxes Payment = $375 per month
Property Insurance Payment = $66.66 per month
Total Mortgage Payment = $1,619.43 per month
As you can see, if you are only taking the loan amount into consideration than you will be unpleasantly surprised when your lender tells you that the house will actually cost you several hundred dollars more per month. But now you know!
Having four payments can seem like a lot or manage, and you're right! What happens when you buy a home is an escrow account is set up for your payments to the lender. Escrow is essentially a third party that holds money for you. Your insurance and property taxes will be paid out of the escrow account each month automatically for you (as you are required to put a certain amount into the escrow account during the buying process, also part of your "closing costs"). So no worries about sending in several payments each month.
If you need a great lender that will help you learn all your numbers before you get surprises, let us know! We have helped over 150 people this year alone learn about buying a home and how much it actually costs. You can request a great lender referral by contacting us here.
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