5 critical action steps every first-time homebuyer must know
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By Noel Dávila
October 19, 2020

So, you want to buy a house? Start by calculating your estimated monthly payment with Money’s mortgage calculator.

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Calculating Your Mortgage Payment

Three main factors determine your monthly mortgage payment: the size of your loan, your interest rate, and the length — or term — of your loan. Your credit score and your home’s location will also affect your interest rate and, in turn, how much you pay. Lastly, additional expenses such as homeowner’s association fees and mortgage insurance should be factored in with your monthly housing expenses.

The Basics

Our mortgage calculator can help you determine if you can realistically afford a home you have your eye on. If you are at the start of your search, it allows you to see how different inputs — home price, credit score, interest rate, and down payment size — might impact your monthly payment and help you determine how much home you can comfortably afford. Keep in mind that mortgage rates change every day and vary from lender to lender, so use this calculator to get a ballpark estimate and then make sure to get quotes from multiple lenders. (We recommend one of the top mortgage lenders of the year.) Once you start actively looking for a home, make sure to get pre-approved, so you can move quickly once you find a home you want to bid for.
To see your estimated mortgage payment, you will need to input the following values:

  • Your starting mortgage balance will be the price you pay for the house minus your down payment.
  • Down Payment: Putting 20% down allows you to avoid paying for mortgage insurance. More equity also gives you more financing options down the road, but the average down payment is about 6%, and it is possible to secure a loan with as little as 3% down. With our calculator, you can enter the portion of the home’s cost you plan to pay upfront either as a percentage or a dollar value.
  • Interest Rate: This is the cost of your loan. Interest on a mortgage is calculated monthly. Our calculator will auto-populate with an average mortgage rate based on the information you enter, but you can override this to see how rate changes could impact your costs.
  • Zip Code: Your location can impact your mortgage rate.
  • Loan Type: The most common mortgage is a 30-year fixed-rate conventional loan, but some people opt for 15-year loans to pay off debt faster or adjustable rate loans to snag a lower rate. In most of the country, if your mortgage is larger than $510,400 you’ll need to take out a jumbo loan.
  • Credit Score: An estimation of your credit health. Fair (580-669), Good (670-739), Very Good (740-799), and Excellent (800 and above).

How Mortgage Interest Rates Have Changed in 2020

As the economy came to a halt in March of this year due to the Coronavirus pandemic, the Federal Reserve cut short-term interest rates to zero. This move led average mortgage rates to drop below 3% for the first time and multiple record lows, as well as a boom in home sales and refinance applications that’s still going strong.

Despite the low rates, the housing market is not without its challenges. A shortage of new listings has led to bidding wars and quickly rising prices in many places. Meanwhile, increasing unemployment rates have driven lenders to adopt more stringent qualification requirements, keeping mortgages out of reach for many.

In light of these developments, potential homebuyers who already have their eyes set on a property should act fast, especially if they’re well-positioned to get the lowest mortgage rate.

Lock in the Lowest Mortgage Rates in History

Before applying for a mortgage, we suggest you get loan estimates from different lenders and compare offers by their APR. A convenient way to keep track of these offers is to import them onto a spreadsheet and compare them side by side. This way, you can consider other factors beyond the advertised rate, such as appraisal fees, property taxes, potential penalties, insurance, and any other closing costs.

All lenders are required to disclose these numbers as part of your Loan Estimate, a form they must provide you within three business after receiving your loan application. Since all lenders follow the same form, comparing all the numbers to find the offer that best suits your needs should be simple. After you select a lender, make sure to get pre-approved, so you can act quickly when you find a home you want to buy.

Once you have accepted an offer, consider getting a rate lock. Rate locks can help you secure a low rate for a specified timeframe (30, 45, 60 days) or until the mortgage’s closing.

If your lock expires before closing, some lenders offer to extend it at no cost, while others might charge a fee. Read up on all these details to have a full picture of a lender before deciding to begin this process with them.

Understanding Mortgage Payments

Interest Rates

Your mortgage rate will play a vital role in determining your monthly payment. In turn, interest rates are influenced by several factors. One of them is your credit score; the lower it is, the higher the interest you will pay on your loan. A low credit score represents a risk, and once you are seen as a high-risk borrower, your rates will go up to compensate for this.

The loan type will also affect your rates because a shorter agreement, like 15 years, represents less risk. Likewise, the type of rate — fixed-rate or adjustable-rate — will also have an impact. Furthermore, the down payment amount you’re willing to put up and your credit’s overall health will be important in determining the interest rate you end up locking in.

Down Payments

Speaking of down payments, if you put less than 20% of the home value upfront, you will need to pay private mortgage insurance (PMI). This type of insurance may cost upwards of 3% of the loan amount per year. And it’s also worth noting that this insurance is put in place to protect the lender, not the borrower. The only exception to this would be an FHA loan, which does not require private mortgage insurance.

Mortgage Points

One way to lower your interest rate and, as a result, your monthly payment is to buy mortgage points from your lender at closing. These points are fees that essentially buy you a lower interest rate. The cost of a mortgage point is 1% of the loan value.

FAQs

What’s the best loan term for my mortgage?

More than 90% of mortgages are 30-year conventional loans. Still, you may find that a 15-year fixed-rate mortgage suits you best because you’ll pay less interest over the life of the loan but with higher monthly payments.

How much should my down payment be?

In general, lenders require a minimum down payment of at least 3% of the home price. To avoid paying private mortgage insurance — which protects the lender, not the homeowner — borrowers will usually need to put 20% down (though low-downpayment, no-PMI options exist for qualified borrowers). The average homeowner pays a down payment of between 3% and 7%.

Can my monthly payment change over the life of the loan?

If you take out a fixed-rate loan and do not refinance, your monthly payment will stay the same for the entire loan term. If you opt for an adjustable-rate mortgage, your payment will stay the same for a set period, commonly five or seven years. After that, your mortgage rate will reset annually based on market conditions, sending your monthly payment up or down with it. The risk of a higher rate later is why it only makes sense to get an adjustable-rate mortgage if you plan to move or refinance before the fixed term is up.

If you refinance to a lower mortgage rate, your monthly payments will go down. If you refinance to a shorter loan term, they will go up.

How accurate are the estimates in this calculator?

Rates are very individualized and will be based on your specific circumstances, such as credit score, down payment, and location. While our estimates are within range of what a lender will ultimately offer you, the best way to find out is to get a quote from one of our top partners and get pre-qualified.

How do I reduce my monthly payment?

Of course, buying a less expensive home will mean lower monthly payments. So putting more money down upfront also reduces the amount of money you need to borrow. Longer loan terms also reduce your monthly payment (though you will ultimately pay more interest over 30 years than 15). A better rate also means a lower monthly payment, so if you are not in a rush, do what you can to increase your credit score.

More from Money:

How to Get Preapproved for a Mortgage: A Step-by-Step Guide for Homebuyers

How to Get the Lowest Mortgage Rate: A Step-by-Step Guide

Buying Mortgage Points Can Lower Your House Payments. But What the Heck Are They?

Disclaimer:We try to keep our information current and accurate. However, interest rates are subject to market fluctuations and vary based on your qualifications. Calculator results assume a good credit score and factor-in regional averages; your actual interest rate may differ. Calculator results are for educational and informational purposes only and are not guaranteed. You should consult a licensed financial professional before making any personal financial decisions.

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