Components of a Mortgage
The loan amount, the interest rate, and the term of the mortgage can have a dramatic effect on the total amount you will eventually pay for a property. Further, mortgage payments typically will include monthly allocations of property taxes, hazard insurance, and (if applicable) private mortgage insurance (PMI).
Use our mortgage calculator with taxes, insurance, pmi, and an amortization schedule to determine how much house you can afford by monthly payment, and how much it will cost you over the life of your home loan.
Understanding the Components of a Mortgage
When you start the house hunt and ask “how much house I can buy?” it is helpful to understand the components of a mortgage and how those components can affect the final mortgage amount. The components of a mortgage include:
- The total amount borrowed. The mortgage loan amount is the dollar total you are borrowing. It is the cost of the property minus any down payment. Keep in mind that the listing price of a property may not be the total amount you need to borrow. The final offer accepted may be higher or lower than the listing price, depending on the buyers and sellers. You may also need to account for closing costs and other costs of purchasing. Closing costs can be 2% or more of the purchase price, and they are not included in the down payment. A 3% closing cost can still add up to tens of thousands of dollars on a house that costs hundreds of thousands of dollars.
- Annual interest rate. The interest rate you pay will depend on a few factors. The bank will offer you a rate based on the current market and also based on the mortgage products they offer. In addition, your financial situation and your credit score will have an impact on the rate. If you have an excellent credit score and are able to offer a down payment of at least 20%, for example, you may qualify for a prime rate, or a lower rate when compared with a homebuyer who is considered to be a higher risk. If you qualify for a federally-insured loan or other loan product with a low rate, your interest rate will also be lower. This lets you save every month as well as save money over the term of your loan.
- The term of your loan. The term of your loan refers to the amount of time you agree to a specific agreement on your mortgage. If you have a fixed-term mortgage, for example, you agree to pay a specific rate for that term.
- Amortization schedule. Your amortization schedule refers to the total amount of time it will take you to pay off your entire home loan. The shorter this period of time is, the more you may need to pay each month to ensure you pay your loan in entirety by that period. The longer your amortization schedule is, the lower your monthly payments can be, but you will most likely pay more for your house in the long run.
Always keep in mind that your monthly payment usually always consists of more than just your mortgage. Be sure to use a mortgage calculator with taxes, insurance, pmi (if less than 20% is put down) to really calculate how much house you can afford by monthly payment.
As you start to calculate your costs and ask “how much mortgage I can borrow?” remember that changing your amortization, down payment, mortgage products or the amount you want to borrow can change your mortgage payments and can make homeownership more affordable. However, it is also important to remember that the loan amount you qualify for may be different than how much house you can actually afford when considering all the costs associated with being a home owner. Be sure to use the free, unbiased calculators at Money Help Center to try out different options to see what might work for you on your path to homeownership.