Buying a house is a significant financial decision that requires careful consideration of various factors. One of the primary considerations is the down payment, which can deplete a significant portion of one's savings in the short term. Additionally, potential homeowners must factor in mortgage payments, which often make up the largest portion of their monthly budget. It is crucial to have a clear understanding of the exact amount to be paid and ensure it aligns with one's overall spending plan. Fortunately, it is possible to determine the monthly mortgage payment before finalizing a sale in many cases. All that is required is knowledge of the house's cost, the down payment amount, the mortgage's interest rate, and the loan term.
For instance, if someone is purchasing an $800,000 home, a 20% down payment would amount to $160,000, meaning they would need to borrow $640,000 through a mortgage loan. Although some individuals make down payments of less than 20%, this example assumes a 20% down payment. One advantage of a down payment of at least 20% is exemption from private mortgage insurance (PMI). Considering this, let's explore the monthly payment for an $800,000 home using different mortgage options.
Example 1: 30-year fixed-rate mortgage at 7.06%
As of January 4, 2024, the national average rate for a 30-year fixed-rate mortgage stood at 7.06%. However, it is important to note that this rate may not be the exact rate one would obtain. Lenders determine the rate based on factors such as location and credit score. Nevertheless, this rate provides a general idea of the monthly mortgage payment for an $800,000 home. With a loan at this rate, the monthly payment would be $4,283, which solely covers the mortgage and excludes homeowners insurance and property tax. The total interest paid on this loan would amount to $902,814, resulting in a total loan payment of $1,542,814. When factoring in the $160,000 down payment, the total cost of the home would be $1,702,814.
Example 2: 15-year fixed-rate mortgage at 6.35%
Opting for a 15-year fixed-rate mortgage instead of a 30-year term can save money on interest in the long run. As of December 29, 2023, the national average interest rate for a 15-year fixed-rate mortgage was 6.35%. Assuming a $1 million home with a $200,000 down payment, the remaining $800,000 financed through a mortgage would result in a monthly payment of $6,903. However, it is essential to consider additional fees like homeowners insurance and property taxes when budgeting housing costs. With this loan, the total interest paid would be $442,558, making the total loan payment amount to $1,242,558. Including the down payment, the house would cost a total of $1,442,448 over 15 years.
Example 3: Adjustable-rate mortgage (ARM)
An alternative mortgage option to consider is an adjustable-rate mortgage (ARM). With an ARM, the loan begins with a fixed rate for a specific period, after which the rate adjusts based on the overall rate environment. For instance, a 5/1 ARM would have a fixed rate for five years, with subsequent adjustments occurring annually. While an ARM presents both risks and potential rewards, predicting the monthly payment beyond the fixed-rate period becomes challenging due to rate adjustments. This makes budgeting more difficult, and potential homebuyers should keep this in mind when considering an ARM.
In conclusion, determining the monthly mortgage payment requires knowledge of the home's cost, the down payment amount, the interest rate, and the loan term. It is crucial to calculate the payment and ensure it aligns with one's budget before committing to purchasing a home. Failure to do so could result in financial difficulties in meeting mortgage costs.
