I’ve learned firsthand that buying real estate is all about the numbers, whether you’re buying your first rental property or adding to an existing portfolio.
One of the most important numbers is your mortgage payment.
Why?
Because once you know this number, you can begin to estimate your cash flow, formulate your investment strategy, and ultimately decide if a property is a good deal or not.
So … how can you calculate it?
That’s exactly what I’ll answer in this guide.
Why Calculate Your Mortgage Payment?
Basic math, in other words, is a key to your own wealth.
Once you know how to calculate a mortgage payment, you can better manage your cash flow, estimate your potential profit, and decide whether you want to buy a given property.
You would never sign on the dotted line if you went into a deal blind. That’s why every investor needs to know how to calculate a mortgage payment.
Factors to Calculate a Mortgage Payment
Several factors go into how to calculate a mortgage payment. Let’s break them down.
Loan Amount
This is the amount of money loaned by the lender, which is used to purchase the property.
It is a key part of how to calculate a mortgage payment because, of course, the more you borrow, the larger your payments will be.
Interest Rate
The interest rate is the percentage amount that you pay on your loan.
The difference between a slightly higher and a slightly lower interest rate will have a huge effect on your mortgage payment.
That is why it is such an important factor when you are shopping for a loan and learning how to calculate a mortgage payment.
Loan Term
The term of the loan is how long you have to repay it.
Mortgage terms can be anywhere from 15 to 30 years. A longer term means lower monthly payments, but you’ll pay more interest over the life of the loan.
This is the essence of how to calculate a mortgage payment and determine what works best for your financial situation.
Mortgage Insurance
A must-know aspect of how to calculate a mortgage payment is whether you need mortgage insurance, as it adds to your monthly payment.
If you’re putting less than 20 percent down, you will usually be required to have mortgage insurance, which, if you default, protects the mortgage lender, and adds to your monthly payment.
Property Taxes
Property taxes depend on where the property is located. They are usually calculated as a percentage of the assessed value of the property, and your monthly payment can be significantly affected by property taxes.
Homeowners Insurance
You need homeowners insurance to protect your investment in your home against such things as fire or theft, and it’s another component to factor into your mortgage payment. It is typically included as a line item in your monthly mortgage payment, so be sure to include it.
HOA Fees and Other Costs
If you own a home in an area with a homeowners association (HOA), you’ll also have an additional monthly bill. You might have maintenance fees, utilities, or a special assessment; it all depends on your property. These aren’t a part of the mortgage payment, but they affect your cash flow and should be considered when learning how to calculate a mortgage payment.
How to Calculate a Mortgage Payment
Armed with these considerations, we can now turn to the question of how to calculate a mortgage payment.
The basic formula is: M = P [r(1+r)^n] / [(1+r)^n – 1] Where:
- M is your monthly mortgage payment.
- P is the loan amount (principal). r is your monthly interest rate (annual rate divided by 12).
- n is the number of payments (loan term in years multiplied by 12).
And yes, there are several calculators you can use to make this process faster.
This formula will give you a good estimate of the monthly payment on your mortgage.
However, there are two things you need to include: property taxes and homeowners insurance (and mortgage insurance if it’s required).
3 Ways to Reduce Your Mortgage Payment
So, having calculated the payment on a mortgage, what can you do to reduce it? Here are some hints.
Shop for a Better Interest Rate
Rates of interest can be very different between different lenders, and a bit of shopping around might yield a better deal, reducing your monthly payment and saving you thousands over the life of the loan.
Opt for a Longer Loan Term
If you opt for a longer loan term, say 30 years instead of 15, your monthly payment will be less.
Sure, you’ll end up paying more interest over the life of the loan, but keeping your monthly costs down is the name of the game.
Make a Larger Down Payment
Paying more upfront, in effect, reduces the loan amount, and could also eliminate the need for mortgage insurance, which also keeps your monthly payments lower.
The Bottom Line: Calculating Mortgage Payment
If you’re a real estate investor, it’s imperative to know how to calculate a mortgage payment right off the bat, because it gives you a competitive edge and empowers you to analyze deals, manage your cash flow, and determine how to invest your money wisely.
Whether you’re new to the game or a seasoned investor, knowing this will keep you on top of your finances and help you maximize your earning potential.
