The process of buying a home is an extremely important decision in any person’s life, it is a very big purchase that can span almost 30 years. The most important cost for homeowners is the monthly mortgage paymentthat is paid over the life of the loan and can be a helpful tool in determining how much you can afford. The monthly mortgage payment is calculated based on the home price, down payment, mortgage rate, and time period. Apart from paying the principal and interest, the payment can also include Private Mortgage Insurance, property tax, homeowners insurance, and HOA fees. The average home price in Rockland County is about $480,000 according to Zillow, and it will be used as the home price in the following examples.
Factors Determining Monthly Payment
1. Home Price
Home price is the most important factor in determining how much your monthly mortgage payment will be for the period of the loan. As the home price and the size of the mortgage increase, monthly payments also increase. There is a simple explanation for this, as the mortgage loan is larger, larger payments are required to pay off the loan in the same period of time. For example, in a 30-year fixed mortgage at a rate of 2.5%, if the home price is $480,000 and the down payment is 20%, the total mortgage is $384,000, the monthly mortgage payment excluding all miscellaneous expenses is $1,500. Now taking the same example but increasing the home price to $580,000 with a 20% down payment would result in a total mortgage of $464,000, and the monthly payment would rise to $1,800. Therefore, a $100,000 change resulted in a $300 or 20% change in monthly mortgage payment!
2. Down Payment
A down payment is the amount of money that is put upfront in the purchase of a home. Down payment plays an important role in determining monthly payment, larger the down payment smaller are the monthly payments. In most cases, a 20% down payment is required by lenders. However, there are lenders that allow for less than 20% down, but they require private mortgage insurance. If you have a lower credit score and do not have enough saved up for a large down payment, certain government loan options such as FHA loan, VA loan, and USDA loan are also available. For example, using the same numbers as earlier, 30-year fixed at 2.5%, and a home price of $480,000 with 20% down, has a monthly payment of $1,500. If we reduce the down payment to 10%, then the mortgage amount is $1,700, which is $200 or 13% more.
3. Mortgage Rate
The mortgage rate is the interest rate charged on your mortgage, higher the rate, higher the monthly payments. Mortgage interest rates are at a historical low due to the COVID-19 pandemic, and therefore it is a great time to get a mortgage or refinance one. All benchmark interest rates such as the FED Funds Rate and Prime rate have been lowered, which results in lower payments if you have an adjustable-rate mortgage. If we look at an example using 2.5% as the mortgage interest rate with the same numbers use previously, the monthly payment is $1,500. However, if we increase the mortgage interest rate to 4% which was the mortgage rate a year ago, the monthly payment will rise to $1,850, which is $350 or 23% more.
4. Term of the Loan
Length of the loan also makes a big difference in monthly payments, as the term of the loan increases, monthly payment falls. The reason for this is, as the term of the loan increases, the payment is spread across a greater period of time, resulting in smaller individual payments. However, it is important to note as the term of the loan increases the total interest paid also increases. For example, in the case of the 30-year fixed, $480,000 example the monthly payment was $1,500. If the term of the loan was reduced to 15 years, the monthly mortgage payment would rise to $2,500 or 67% more.
5. Miscellaneous Expenses
- Private Mortgage Insurance (PMI) – PMI is mortgage insurance which is required by lenders when the down payment is less than 20% of the home purchase price. This is paid because there is additional risk to the lender as the upfront payment is lower. PMI rate is between 0.4% to 2.25%, it is dependent on several factors such as the size of the loan, down payment, credit score, and type of mortgage. PMI can add anywhere from $140 to $800 to your monthly payment depending on the PMI rate you receive.
- Home-owners Insurance – It is a type of property insurance that protects you financially in the event of your home being damaged. It includes insurance for interior damage, external damage, damage of assets, and injury that occurs on the property. The average home owner’s insurance inRockland County is $110 per month.
- Property Tax – Property tax is the amount that is paid to the local government, the property tax rate changes every year. In Rockland County, theproperty tax rate is 1.73%which is one of the highest property tax rates in the country, ranking 5th out of 3,143counties! This will result in an additional $700 in your monthly mortgage payments.
- Home-owners Association Fee (HOA) – HOA fee depends on the type of property that you live in and is paid to the local association for maintenance and upkeep of the community. HOA fee can be anywhere from $100 to $600 per month.
In conclusion, your monthly mortgage payment can vary a lot depending on several factors such as home price, down payment, mortgage rate, term of the loan, and other expenses. As a home buyer, you can take several decisions to try to reduce your payment by, putting 20% down so that you do not have to pay for insurance (PMI), the term of the loan can be longer, you can also wait for a low-interest rate environment like the one we are in now! Therefore, putting all these values together, in a 30-year fixed mortgage at 2.5% with a home price of $480,000 and 20% down, along with $110 for homeowner’s insurance, $700 for property tax and $200 for HOA fee, your total monthly payment on average will be $2,500.