Most mortgage calculators only provide you with basic information regarding the home price, down payment, interest rate, and mortgage term. While these are often the most critical aspects of any home purchase, someone looking to calibrate their cost expectations for purchasing a home could grossly underestimate the expected costs as real estate property taxes must also be included in the cost of owning property, and also, homeowner’s insurance is almost an additional cost if you are borrowing to purchase a home.
Further, if you anticipate paying less than 20% on a home, you will also be subject to private mortgage insurance until have 20% equity in your home. These extra factors can almost certainly add several hundred dollars or more to the costs associated with home ownership, and it is important to take them fully into account before making a purchase. With that in mind, I have prepared a free mortgage calculator that lets you also calculate the costs associated with PMI, HOA fees, taxes, insurances, as well as giving you the ability to determine how much quicker you can pay off your mortgage depending the size of any extra payments that you make.
Key Mortgage Cost Terms To Calculate
Interest on Loan: Sometimes, it can be surprising to see what percentage of your mortgage payments go towards interest on your home loan rather than paying off the principal. Since the average mortgage rate in the United States is now 4.62%, every $100,000 that you borrow will require $184,745 in total payments over the course of a typical thirty-year mortgage. This means that you would be paying $84,745 in total interest, which amounts to $235 per month in interest payments on average over the course of the loan.
Of course, the loans themselves require you to pay the interest first before the principal, meaning that you will spend the first five to ten years of the loans paying mostly interest, and at the end of the loan, you will be paying almost entirely principal. You should use the calculator to adjust for the mortgage rate that you are contemplating, and then compare the interest figures that would result if you make extra payments. An extra $100 or $200 per month all goes towards paying off the principal, and can be quite helpful in shaving several years off the payment of your mortgage.
Extra Payments: The extra payments tab on the calculator allows you to calculate how much more quickly you can pay off your mortgage if you pay a little bit more than the minimum each month. In my own experience, there are many people who have told me anecdotally that their financial lives really started to change once they had their mortgage paid off and that $1,400 per month mortgage payment (or whatever the amount was) could be rededicated towards investing. It is not advisable for everyone to pay off their mortgage as quickly as possible since a property mortgage/lien can sometimes inadvertently protect your home from other lienholders making a claim and foreclosing on your home, but asset-protection strategies aside, it is good to understand to how and why making those extra payments can lower the amount of interest that you pay financial institutions in interest for your home loan.
Homeowner’s Insurance: Almost every, if not every, mortgage lender requires that the borrower obtain homeowner’s insurance in connection with the purchase of a home. This is because, if say the house burns down, the lender is not left in a situation without collateral. By requiring homeowner’s insurance, the lender can be sure that if some type of natural disaster or unusual event damages the home, an insurance company should be there to step in and pay for the value of what was damaged. The average cost of homeowner’s insurance in the United States is $1,131 per year, which amounts to a little over $94 per month, based on an average deductible between $500 and $1,000.
Taxes: The local governments (usually in the county) in most states enact a property taxes to raise revenue for local programs, most often public schools. In 2018, the average property tax payment was $2,197. Even though these payments are due annually, many lenders now enter into an escrow arrangement in which they will collect a pro-rata percentage of your taxes each month in order to ensure that payment is made for the taxes. If someone owes the average amount of taxes in the United States, the monthly payment would be slightly above $183 per month. The reason why lenders frequently require that taxes be paid to them under an escrow arrangement is because unpaid real estate taxes become a “super-priority lien” on the property that gets paid out of the home’s sale proceeds first in the event of a foreclosure, and the lender’s collection of taxes via an escrow arrangement ensures that no one cuts in front of them in line.
Private Mortgage Insurance (PMI): The reason why the traditional down payment of 20% exists is because it protects lenders against the possibility of price depreciation in the event that a borrower does not make their loan payments and the lender elects to foreclose. If someone borrows $180,000 to buy a $200,000 house, it is not inconceivable that a poor housing market could reduce the value of the home to $175,000. If this were to occur right after the loan went into effect, the lender’s collateral (i.e. the home the borrower purchases) would be under-collateralized by $5,000 (the $180,000 in loan minus the $175,000 in home value). To protect the lender from this risk, private mortgage insurance exists to pay the lender the $5,000 difference in the event that a foreclosure sale results in a lower recovery than the amount due on the mortgage note.
According to Investopedia, the average PMI rate in the United States is between 0.3% and 1.2%. This means that for every $100,000 you borrow, you are looking at $300 to $1,200 in annual PMI fees, which amounts to somewhere between $25 to $100 per month for every $100,000 borrowed. The good news is that private mortgage mortgage does not last forever, it only lasts until you have paid off the mortgage to the down to 80% of the home’s appraised value–i.e. until you reach the point as though you had paid a down payment of 20%. If you anticipate putting down less than 20% on a home purchase, you should be sure to include private mortgage payments in the calculator.
Every year, the homeowner’s association makes a “declaration” of the amount that will be charged against the residents that belong to the HOA. If these fees are not paid, the HOA can usually obtain a lien against your property to ensure payment. It is important to understand the terms of any homeowner’s association agreement before you buy a piece of land, as these fees can sometimes be high and unexpected, particularly if there are terms authorizing the HOA to make large capital expenditures to improve the area.E
Homeowner’s Associate (HOA) fees: Certain residential areas execute real estate covenants that are recorded at the local Recorder of Deed’s Office which creates a homeowner’s association to perform certain tasks in a particular subdivision or grouping of homes, which often includes basic maintenance services. To pay for these services, which may include snow and ice removal, grass-cutting, or private road repairs, the homeowner must pay a certain fee annually (or sometimes monthly) to the homeowner’s association. The amount that the homeowner’s association is able to charge is set out in the “indenture” that is recorded against your property and which you may review at the local recorder’s office (or, depending upon the county, even order online).
Conclusion: Each of these various fees, relating to taxes, HOAs, and insurance, can add several hundred dollars in additional costs to your housing payments. It is important to keep them all in mind in preparing to determine what you can afford. The good is that most borrowers opt for a fixed rate mortgage, which means that your mortgage payment stays the same throughout your loan, and hopefully you will continue to earn more money throughout the course of paying off your mortgage, making the payment easier over time.