What Makes a Mortgage Payment?

Mortgage payments are made up of a few different costs. Of course, there’s what you pay each month toward your loan balance—that’s called the “principal.”

In addition to this, you’ll also pay for interest. This is essentially your costs to borrow the money, with the exact charge determined by your interest rate. For example, if you get a mortgage with a 3.5% rate, you’ll pay 3.5% of your total balance every year in interest. (On a $200,000 loan, that’d be around $7,000 the first year.)

Finally, on top of principal and interest, you also may have your homeowners and mortgage insurance premiums, as well as your property taxes, rolled into your monthly payment. The costs of these vary based on your insurance policies and the property tax rates where your home is located.

Here’s a quick look at what a typical monthly mortgage payment might look like for a 30-year, $200,000 mortgage with a 3.5% rate:

• Principal & interest - $900
• Property taxes - $250
• Homeowners insurance - $100
• Mortgage insurance - $45

Total monthly payment = $1,295

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Mortgage Payments are Variable

As you can see, a lot goes into a monthly mortgage payment. Because of this, monthly payments vary greatly. Your loan balance, your interest rate, your homeowner’s insurance policy, and where you buy a home can all play a role in what you pay for your mortgage, as well as what you can afford as a homebuyer.

Let’s look at each of these factors, as well as how they’ll impact your mortgage payment:

Loan amount

The more you borrow to buy your home, the more your monthly payment will likely be.

Length of your loan

Longer-term loans spread your payments out over more months.  If you have a longer-term loan (say, 30 years), you’ll usually pay less per month than with a shorter-term one (15 years, for example).

Your homeowner’s insurance policy

If your insurance premium is lumped into your mortgage payment, the size of your annual premium will play a role in your monthly costs, too.

The type of loan you take out

Some mortgage loans require what’s called mortgage insurance. If you have a loan of this sort, you’ll pay a fee as part of your monthly payment.

The location of your house

Every city and county has different property tax rates, so if your taxes are rolled into your payments, the exact location of your home will matter as well.

Mortgage payments are flexible, and changing just one factor—like the length of your loan or the location where you buy your house—can have a major impact on what you’ll pay monthly to own your home.

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Determining What You Can Afford

If you’re looking to buy a house, your best bet is to start with a budget. Figure out what you can afford on a monthly basis, and then work with a mortgage lender to find a loan option that falls within that range.

To do this, you’ll need to:

Total up your monthly take-home pay.

Make sure to include both your income and that of your spouse, partner, or anyone else who will be buying the home with you.

Add up your monthly debts and obligations.

Do you have student loan payments? How much is your phone bill, and what do you spend on groceries every month? Use a spreadsheet to map out your monthly costs.

Determine what you have left for a mortgage payment.

Once you know what you’re bringing in versus what you’re paying out each month, you can home in on what size mortgage payment you might be able to afford. Just make sure you leave a little cushion for emergencies, as well as any home maintenance issues or repairs that might crop up.

It’s not uncommon to seek a mortgage payment that’s right around what you’re currently paying for rent. In many markets, you might even pay less than your rent once you buy a home. Again, it all depends on the loan amount, your location, and a number of other factors.

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Ways to Lower Your Mortgage Payment

If you know you can’t afford a huge monthly payment, that doesn’t mean homeownership is out of reach. There are several strategies you can use to ensure your payment is both manageable and affordable.

Here are just a few:

Improve your credit before applying.

Your credit score directly impacts what mortgage rates you qualify for. A higher score usually means a lower rate, which also helps lower your monthly payment. A lower score does the opposite, sending your rate (and probably your payment) higher.

If buying a home is on your radar, you’ll want to pull your credit report and your score well before starting the search. If your score is low (850 is perfect), then take some time to improve it. Pay down some of your loans and debts, settle any late payments or overdue accounts, and ask if your landlord can start reporting your rent to credit bureaus. This can help improve your score over time.

Find a cheaper insurance policy.

Shopping around for your homeowner’s insurance can help a lot, too. Consider at least two or three different insurance companies, and compare their coverages and premiums line by line. If you can get a lower premium on your policy, it very well might lower your mortgage payments as well.

Once you do find an insurance company, make sure to ask about any discounts you might qualify for. Sometimes, setting up auto payments or bundling your policy with your car insurance can help lower your premiums, too.

Make a bigger down payment.

If you can put more down up front, it can also help lower your monthly payment. For one, a lower down payment means you’ll need to borrow less — and that equates to a lower balance and a lower monthly payment.

A bigger down payment might also help you snag a lower interest rate and, depending on what type of loan you have, it could also mean avoiding private mortgage insurance — yet another way to save on that monthly payment.

Buy somewhere with low property taxes.

Property taxes vary widely depending on what city, county, and school district your house is in, as well as what water districts and other utility providers serve the area. To help lower your monthly mortgage payment, make sure you’re focusing your home search on locales with low property tax rates. You can usually find property rate data on a home’s listing on Zillow or Trulia, but if not, your real estate agent should be able to help here, too.

Think about an adjustable-rate mortgage.

Adjustable-rate mortgages have interest rates that fluctuate. They usually start off with a really low rate, but that rate can increase later on (usually five, seven, or 10 years down the line). If you know you’ll only be in your home a short amount of time, you might be able to enjoy that low rate before it increases. That means a lower monthly payment and less paid in interest to boot.

If you’re searching for a forever home, an adjustable-rate loan can still be a smart option. You will just want to refinance your loan before your rate can increase.

Choose a longer-term loan.

When you get a longer-term mortgage loan, you spread your balance over more time—and that means lower monthly payments. This is typically why homebuyers choose 30-year loans when purchasing their first house, as it helps minimize their monthly costs while they ease into being a homeowner.

Just keep in mind here: Longer-term loans also come with more in interest costs. For example, a 30-year, $200,000 loan at a 3.5% means paying $123,312 in interest over the life of the mortgage. A 15-year loan with the same terms? Interest costs drop to just $57,357. While the monthly costs are lower on the first loan, total interest costs are much higher over time.

Buy a cheaper house.

When in doubt, lower your price point and search for a home you can buy for less. This might mean looking on the outskirts of your ideal city or suburb (more rural areas tend to be cheaper) or buying a fixer-upper that needs a little TLC. You could also consider a smaller home like a townhouse or condo. These are typically cheaper than spacious, single-family properties.

The main takeaway here is that the more you pay for your home, the more your monthly payment will be. If you can make an effort to find a lower-priced house, your payment will thank you for it.

Consider a different loan type.

Some loans require mortgage insurance, which adds an extra cost to your monthly payment. If you really want to lower your monthly costs, then choosing a loan without this requirement might be your best option.

Since loan programs are different at every lender, it’s important to talk to yours about any no-mortgage insurance options that you might be eligible for. In some cases, you may need to make a bigger down payment in order to qualify for these options.

A Mortgage is Within Reach

Mortgage payments are based on many, many factors, and there are dozens of ways you can reduce your payment and make sure it’s within your means. If you’re still not sure a mortgage payment is doable with your current income or budget, get in touch with our team here at Lower. We’ll walk you through options that can work for your budget.

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