As a real estate agent, many people ask me how much their payment would be on a house, whether that is a $100,000, $200,000 or $300,000 home. There is no one size fits all answer to what your payment would be because many factors will increase or decrease the payment on a mortgage. The amount of the down payment, interest rates, term of the loan, mortgage insurance, property taxes and other factors will all determine what your payment amount will be. It is very important what your payment is because lenders will qualify borrowers based on their monthly income and monthly payments. With this article I hope to show you how you can accurately judge what your own payment would be on any price home.
How is the principle and interest calculated on your house payment?
The interest on a mortgage is not calculated strictly on the interest charged. With a basic interest loan, a 10 percent interest rate on a $200,000 home would be $20,000 a year, or $1,667 a month. However, mortgages are structured to slowly pay down the principal owed as well. The payments would be higher than $1,667 a month because part of the principal would be paid down every month. The payment would be closer to $1,755 a month, based on a 30 year mortgage. In the beginning of the loan, less principal is paid off than at the end of the loan. The chart below shows what the amortization table looks like the first few years.
Month Payment Principal Interest Total Interest Loan balance
In two years, the amount of principal paid each month would increase to $108 a month from $88 a month. Although you are paying off the loan on a mortgage, you are paying it off very slowly. The more time that goes by, more of your payment goes to pay off the loan and less to interest. In year ten you are paying off close to $250 a month in principal.
Why are low interest rates important to home owners?
The lower an interest rate is, the lower your mortgage payment will be. However, a 5 percent interest rate does not mean your payment will be 50 percent of what a 10 percent interest rate would produce. If the interest rate was 5 percent on a $200,000 loan, which is close to what rates are today, your payment would be $1,074 per month. You are paying almost $700 a month less than a 10 percent interest rate, but why is the payment not even lower? After all, 5 percent is half of 10 percent, so shouldn’t the payment be half as much? With the 5 percent interest rate, you are paying $240 a month in principal from the very beginning. The actual interest you are paying is 50 percent less on the 5 percent loan, but you are paying much more in principal.
Not only are you paying a smaller payment, and paying more principal with a low-interest loan, you can qualify for a more expensive home. Lenders qualify buyers on their debt to income ratios. The debt to income ratio is the percentage of debt (credit cards, car payments, mortgage payments, etc.) you pay each month, compared to the income you make each month. If interest rates are 10 percent, your payment would be $1,755 on the $200,000 mortgage. Maybe you can qualify for an $1,800 mortgage (counting principal and interest only), so at 10 percent you can qualify for a $200,000 loan. If rates were 5 percent, you could get a loan for $330,000 and your payment would only be $1,771 a month. The lower interest rates are, the more house you can qualify for. The really cool thing is that you would be paying off almost $400 a month in principal with the 5 percent, $330,000 loan, compared to only $88 a month with the 10 percent, $200,000 loan.
What else do you need to consider when figuring out what your mortgage payment will be?
Up to this point, I have only been talking about principal and interest, however there is more to a payment. You will have to pay property taxes, insurance and possibly mortgage insurance.
- Property taxes: This is how much the state, county and city charge you to own a house. The taxes pay for schools, roads, etc. Some states have higher taxes than other states. In Colorado, I pay about $1,000 to $1,500 a year in property taxes on a $200,000 house. In New Jersey you may pay $5,000 to $10,000 a year in property taxes on a $200,000 home. That could mean a difference in $600 a month just from taxes!
- Insurance: When you get a loan, the lender will require that you carry home owners insurance. This protects the bank in case the house burns down or gets destroyed by a tornado. Insurance varies by state as well based on the risk that state has for weather or natural disasters. If the home is in a flood zone, the insurance can be very pricey.
- Mortgage insurance: Mortgage insurance is a cost most buyers have to pay when they put less than 20 percent down. Most loans including FHA and conventional will have mortgage insurance. Here is an article with much more information.
When you factor in these costs the payment on a $200,000 home will be much more than just the principal and interest.
- Principal and interest: $1,074
- Property taxes: $200
- Insurance: $70
- Mortgage insurance: $175
Total payment: $1,519
It is very important to know what your insurance will be, what your taxes will be, and what the mortgage insurance will be when buying a house. All of these costs greatly affect your mortgage payment and your ability to qualify for a loan. If you put 5 percent down and live in a flood plain in New Jersey, you may be paying $2,000 a month for your mortgage. If put 20 percent down and you live in Colorado, you may pay $1,300 a month for the same loan.
For more information on getting loans, especially on investment properties. Check out my book How to Finance Multiple Investment properties on Amazon. You can also get a PDF version in the InvestFourMore Store.
What would your mortgage payment be on different loan amounts?
Payment amounts vary on the size of the loan as well. Here is a chart for different principal and interest amounts on a 5 percent, 30 year loan.
Loan amount Payment
Remember, you would have to add the other costs to that payment amount to get your true payment.
How does a 15 year loan affect your mortgage payment?
Many people get 15 year loans because it reduces the time of the loan and the amount of interest paid. If we took that same 30 year loan for $200,000 and used a 15 year loan instead of a 30 year loan, here is what would happen:
30 year loan 15 year loan
Payment: $1,074 $1,582
Principal $240 $748
The payment amount and the amount of principal paid down every month increases by $508 dollars. That doesn’t seem like a huge advantage, but the interest rate on a 15 year loan is usually less than a 30 year loan. Instead of paying 5 percent interest, you may only be paying 4.5 percent interest, which would decrease the payment to $1,530 a month, and increase the principal pay-down to $780 a month.
You may think you should get a 15 year mortgage if you can afford it. However, I personally think 15 year mortgages are a bad idea for most people especially if you want to invest in real estate. The higher payment makes it harder to qualify for more houses, you have less flexibility, and I don’t think the savings is worth it. I also could be investing that extra $500 a month into something that makes me much more money than the savings a 15 year mortgage provides.
The payment can vary greatly on a house depending on the interest rate, taxes, insurance and mortgage insurance. If you choose to get a 15 year mortgage, it can really increase your payments. I think it is pretty obvious that no matter what loan you get, the low interest rates we have are a huge advantage. Remember that just because a lender says you can qualify for so much, that does not mean you can actually afford to pay that much per month.