(NewsNation) — Mortgage rates are at their lowest level in two years — and could fall further — but interest payments are just one of the costs that come with a mortgage.
Buyers also have to take into account property taxes and insurance — both of which contribute to the overall monthly payment.
The length of your mortgage, also known as the loan term, will also impact the size of your payment. Typically, a longer loan term means smaller monthly payments but higher interest costs, while a shorter loan term requires higher monthly payments but less interest over time.
NewsNation has created a mortgage calculator to help you make sense of it all.
Mortgage Calculator
This calculator helps you estimate your monthly mortgage payment. It adds up the loan payment (principal + interest), property tax, and insurance. The loan payment is spread out over the years of your loan term.
Principal and Interest: $
Property Tax: $
Homeowners Insurance: $
Total Estimated Monthly Payment: $
What goes into a monthly mortgage payment?
The basic components of a monthly mortgage payment are PITI: Principal, Interest, Taxes and Insurance.
Principal or Loan Amount: The amount you borrow from a lender to buy a home. Each month, a portion of your payment goes toward repaying that loan. Over time, those payments lower your mortgage balance until the loan is fully repaid.
Annual Interest Rate: This is what the lender charges you for lending you money. When people refer to “mortgage rates,” they’re talking about the interest rate on a home loan. Part of your monthly payment goes toward paying interest, especially at the beginning of your mortgage because your loan balance is higher.
Taxes or Annual Property Tax: Typically, your monthly mortgage payment will include property taxes, which are calculated by the government and based on your home’s value. These payments are generally put in an escrow account and then your lender pays them on your behalf when they’re due.
Homeowner’s insurance: This protects you and your lender if there’s damage to your home, like a fire or burglary. Your mortgage payment usually includes one-twelfth of the annual cost, which goes into an escrow account. When your insurance is due, the lender pays from that account.
Additionally, prospective homeowners may want to consider factoring private mortgage insurance into their monthly total. This is not included in NewsNation’s calculator but can also be considered part of your overall mortgage costs.
Private mortgage insurance: If your down payment is less than 20%, there’s a good chance you’ll have to pay for mortgage insurance, which protects the lender if you can’t keep up with your monthly payments. As with property taxes and homeowners insurance, you’ll pay one-twelfth of your annual premium each month into an escrow account.
What are the different types of mortgages?
Fixed-rate mortgages are the most common type of home loan. With fixed-rate mortgages, your interest rate doesn’t change over time. That means your principal and interest payments will remain the same throughout the loan.
- 30-year fixed term: A home loan with a 30-year repayment period and by far the most common. According to Freddie Mac, 90% of homebuyers choose a 30-year fixed-rate mortgage. Due to the length of the loan, you’ll pay more interest over time compared to shorter options.
- The average rate on a 30-year fixed mortgage was 6.09% for the week ending Sept. 19.
- 15-year fixed term: A home loan that borrowers repay over 15 years. This will have higher monthly payments but you’ll pay less interest over the life of the loan. You’ll also get a better rate compared to a longer mortgage term.
- The average rate on a 15-year fixed mortgage was 5.15% for the week ending Sept. 19.
Adjustable-rate mortgages (ARMs) are another option for homebuyers. An ARM is a loan where the interest rate changes over the course of the loan. That means homeowners could see their monthly payments go up over time.
How to get the best mortgage rate?
There are several ways to set yourself up to get the best possible mortgage rate.
- Credit score: Generally, consumers with high credit scores receive lower interest rates than those with low credit scores.
- According to a recent Realtor.com report, improving your credit score from Bad (under 600 FICO) to Very Good (750–800) can lower your mortgage rate by 39 basis points.
- Down payment: Typically, the more money you put down, the better interest rate you can get. Putting at least 20% down can also help you avoid paying for mortgage insurance.
- Loan term: Longer loan terms usually come with higher interest rates, whereas a shorter-term loan, will come with higher monthly payments but less interest.
- Debt-to-income ratio: How much money you make can impact your mortgage rate. Borrowers with a low debt-to-income ratio, meaning their debt payment is a small portion of their monthly income, are generally considered lower risk.
- Shop around: Weighing your options can lead to big savings. Realtor.com found an average difference of 86 basis points between the least expensive and most expensive lenders.