Estimating monthly mortgage, taxes, and insurance

When the mortgage agent quoted me a monthly payment, I hoped it had all the costs included - since that's what I asked him to quote me. I think he told me $750/month for a $130,000 home. I ended up offering $136,500 on the house, which is a bit more, but when I got the final paperwork, it turns out my actual monthly payments will be $950! Here's how you can estimate your own mortgage payment to determine how much you can really afford:

I had tried not to get my hopes up, and figured the monthly cost could be a bit higher than quoted, but that's over 25% more than what the mortgage agent quoted me. So, what costs do you have to budget for when guesstimating your monthly mortgage payment?

First, start with a good mortgage calculator - there are plenty around on the web. This should give you a good base estimate to start with.

Next, estimate your interest rate. I am getting an FHA loan with 3.5% down - my interest rate is 3.75%. The interest rate will make a huge difference in your monthly bill. For my purchase price of $136,500, less 3.5% down, a basic mortgage calculator spits out $610/month in mortgage payments.

Then, since I am not putting down 20%, the bank will charge me PMI (private mortgage insurance.) This is essentially extra interest of 0.5% - making my true interest rate 4.25%. This brings my monthly payment up to $665/month (until I reach a certain level of equity.)

Your mortgage calculator may estimate property taxes for you (monthly property tax payments are often included with your payments to the mortgage company) - the calculator I used estimated taxes of 1.25% - this brought the monthly fee up to $810/month. The estimated tax is about $145 per month. However, I know that the neighborhood I'm buying in can have some high property taxes due to the tax market value being high, even when home values have dropped, or because the property is owned by an investment company, rather than an individual who lives in the house. Also, because we are in the city proper, we have to pay city taxes as well as county taxes.

To check on the accuracy of the estimated tax costs, I looked up the prior year tax bill online. A quick search for "county name" plus "tax bill" on google, and I easily found the public record tax bill for the home. Sure enough, it looks like the previous owner actuall paid $190/month in taxes last year. So, instead of $810/month, I'm now looking at $855/month.

Finally, add in homeowners insurance. I used Liberty Mutual to easily get an online quote - the other insurance companies would only give a quote if you called them. They estimated by homeowners insurance to be about $65/month, but I dropped this to something like $58/month since I have my auto insurance with them.

So, my total estimated monthly cost is about $910/month. This is much closer to the final quote from the mortgage company, but I would still add another 10% to this estimate, and then decide if that's a number you're comfortable with.

If not, it might be good toconsider some other options: Use a buy-to-let mortgage calculator to see if you can turn your rental into your permanent home. Look at buying in a different neighborhood, or, if you're really set on the neighborhood, wait for a smaller house to come on the market. Renting for a little while longer while you save up a bigger downpayment can help too. Happy house hunting and mortgage calculating!

photo by amg.lincluden @ flickr.com

Related posts:

1. Taxes and other unexpected bills
2. A sad realization
3. Investment Income and Taxes