Deciding when to shop for your first home can be a big decision.
Maybe you've been holding down the rent payments on your apartment for a few years and you're ready to invest in a place of your own. Maybe you just got married and you're looking for a house with a backyard for your two dogs. No matter what your motivation for taking this step, it's important to start by figuring out how much you can spend on a home without breaking your budget.
The problem is, for first-time home buyers, understanding how mortgage payments are calculated can be about as clear as mud. To help you navigate the numbers, here's a breakdown of what you'll need to think about when estimating your monthly payment:
1. Property Price
The starting off point to figure out your mortgage payment is the property price. Once a buyer and seller agree on a sale price, almost all mortgage lenders will use the results of an appraisal to find out how much the house is actually worth. According to an article on Zillow, lenders might not issue a loan for more than the appraised value, but you can always put up your own money to cover the difference.
2. Down Payment
The amount of your down payment can vary based on a few factors. When shopping for your first home, you want to be realistic about how much cash you will have available for your down payment and closing costs. Speaking to a mortgage lender ahead of time will help you figure out how much you should save for the down payment on the house of your dreams. Once you're ready to get started, here are some tips on how to save for that down payment.
3. Loan term
Your payment can go up or down depending on how much time you have to pay off your loan. MortgateCalculator.org ranks 30-year home loans as the most common.
4. Interest Rate
According to the Consumer Financial Protection Bureau, your interest rate is based on things like your credit score, the economy, how much you're looking to borrow, and where your house is located. Because these rates change with the market, it's impossible to pinpoint exactly where they might be on the date of your closing. You want to speak to your lender to figure out how to get the best rate at the time you're ready to buy.
5. Property Taxes
Property taxes are set based on where your house is located. Certain metro Atlanta areas have higher property tax rates than others so you might want to do your research to see how local counties compare. Also, property taxes can change over time so you'll probably see a slight difference in your monthly payment amount from year to year.
6. Other Factors
The monthly payment on your home sometimes includes some other factors. Here are a few you might want to keep in mind:
- Homeowners Insurance: Your annual homeowners insurance premium is usually rolled into your mortgage payment.
- Private mortgage insurance: Private mortgage insurance (PMI) may be added to your mortgage payment depending on your lender's requirements.
- HOA Fees: If your property is a part of a mandatory Homeowners Association, you will have to pay annual fees to participate. HOA fees are paid separately from your mortgage, but should be included in your payment estimates because they are typically paid monthly.
Here's a quick example of a mortgage calculation using the Berkshire Hathaway HomeServices app for Georgia properties:
- Sale price: $195,000
- Down payment: $6,825 (3.5 percent)
- Loan term: 30 years
- Interest rate: 4.5 percent
- Property taxes: $1,200/year
- Homeowners insurance: $700/year
- HOA dues: $125/month
- PMI: $180/month
Based on these numbers, a ballpark guess for your mortgage would be about $1,417 per month.
Fortunately, there are several real estate apps and websites that include free mortgage calculators. These tools can help you estimate how much a specific home might cost you per month. However, because mortgage payments can vary based on your specific situation, it is vital to speak to a mortgage lender before kicking off your home search to get the best idea of how much you'll pay monthly for that dream house.
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