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How Much is the Monthly Payment?: A Simple Formula

In the early stages of the home buying process, many clients will often ask me what the monthly payment will be based on a price of a particular property.

It is impossible to answer this question without knowing more about the situation:

what is your credit score?
what is the interest rate on the loan?
how much money are you putting in as a down payment?
what are the taxes on the property?
how much are the association dues or condo fees?
what type of loan program do you have?

Calculating the monthly payment needs to weigh in all these factors. This is best left for explanation by the mortgage professionals who can quickly feed in all these numbers into their financial calculators or computers which run through a series of complex formulas to determine the answer.

However, clients still want an answer. So here is a rule of thumb, simple formula that gives a ballpark estimate.

Assuming a 30 year fixed rate mortgage, and assuming a 6% interest rate, the monthly payment of principal and interest only (not including taxes, insurance and other fees) is equal to $6 per $1000 of loan per month.

Plugging a $300,000 loan into this formula, you would find that the monthly payment would be approximately $1800/month.

This formula will give you a general idea of your monthly payment. The interest rates will vary and you'll need to increase the amount based on that, but the math is easier to do in your head with the flat $6 rate. Then you need to add in the taxes and condo or association fees, as well as insurance.

While you should consult your mortgage lender to get a good faith estimate and a more accurate picture of how your payments will look under your actual mortgage program, you can use this simple formula as a guideline to determine a monthly payment that you'll be able to afford.

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Posted by Brian Block -- Northern Virginia & D.C. Real Estate on 09/29/2007 07:01 AM

Comments (29)

mortgage, mortgage lenders, brian block, northern virginia real estate blog, monthly payment

29 Comments on How Much is the Monthly Payment?: A Simple Formula

SEP

2007

Brian,

That makes it simple. I see many people because I sit at a builder model center. Like you, I get asked that question almost every day. Thanks.

Brian, I have always used 1% as a rule. Almost always that is a higher number than what the true payment will be. I let them know that should be PITI and HOA. If where to use your example at 300,000K 1,800 PI in Florida taxes are roughly 2% of the purchase price) $500 + Insurance est. 1% 250 = $ 2,550 which will leave you $450 for HOA or if taxes are higher etc.... If the person is really sweating that number than I tell them they are on to much home. Great Post.. 5 for me

Thanks, I carry one of those little cards around that give you percent and type of loan then multiple by 1000 .

Brian, great advice! I delegate this to a terrific loan officer before my buyers get into my car. It saves us the trouble of looking at stuff they can't afford and that will spoil them for the price range they can actually afford!

Good information.I use the same example of $6/ per $1000. Rates have been around there for some time. I also carry some cards with rates on the back side .

I'm with Matthew - I factor at 6%, include estimated annual taxes of 2% of purchase price (not including homestead exemption, but that could be completely different story come January 2008), and a solid insurance number as that has been increasing as well.

Brian, your post is a good one...if people insist on figuring this out. But you said it best with this: folks need to speak with a lender, get pre-approved based on the factors you mention, and get a Good Faith Estimate.

If someone came to a Realtor and said "How much does a house cost nowadays?" there would be no short answer. Too much variety. You got to investigate what kind of homes you'll be looking at.

It's similar with loans. It's almost ridiculous to estiamte what someone's monthly payment would be without them going through the application and pre-approval process.

I suppose there could be an exception if they have 20% down, great credit, few debts and documented income, but I've had too many clients confused by the estimates that non-lenders (including Realtors) have given them. It hurts everyone's credibility.

Brian - I have used this basic formula myself to shorthand things when I am "on the street" with my clients. I don't mind giving them the basics, but you're right about meeting with the lender. Many times, my clients will ask me very detailed questions about financing, which I defer to our mortgage broker. Good post!

funny you use this as a method. Our Realtor did the same thing and told me to do this. I was not a loan officer yet so I did.

Well it turned out that I was wrong. We had a lower % rate so I was happy and thought we just cut our payment. Well as it turned out we had a payment that was 2 times that. Property taxes kill us. I am glad we had money to put down.

By the way. As a loan officer I run into this problem now with people wanting to buy a house and have a contract. When I tell them what their housing cost are they freak. Some end up pulling out of the deal and others will not get the loan. I really would tell the clients to talk to a loan officer. In reality they are not a client just a lead if they can not buy a home. The Realtors that I work with that do this say they end up selling more and working less.

STEVE: I think all agents must get asked this question all the time. It's definitely impossible to give a real answer without knowing all of the circumstances, but this easy formula at least gives the buyers a yardstick by which to measure.

MATTHEW: That seems like a pretty good rule of thumb too and clients are always happy when their actual payment is lower than the estimate.

CHARLIE: Thanks for the comments. Some agents have that printed on the back of their business cards. That can be helpful to clients as well.

PATRICIA: Good job -- get them to see the loan officer first before entering your car. No approval letter, no ride. One of my friends calls his car "BOGO" -- buy or get out!

GITA: Thanks for your comments. I think that the example is a good rule of thumb. Obviously rates fluctuate, but they have been between 6 and 6 1/2 for quite a while.

SEP

2007

Interesting and simple. Good stuff. Muchas gracias!

Thanks. I'm not a mathmatician so any little bit helps :)

All the best,

Beth

BRIAN: Nice lesson about figuring it out on the fly. I would also recommend getting a mortgage calculator to keep in your car if this is a question that comes up a lot. If you use this method, I would make sure to tell them that you are picking 6% as a starting point, but that it can actually be more expensive depending on other factors. Another way of doing it when you're near a computer is to go to a website like Interest.com and use the calculator that they provide.

CAROL: Thanks for sharing your method of calculation and commenting on the post.

JOEY: Thanks for your comments. First and foremost, I tell people that the lender will give them the whole story. I warn people that this estimate is a very rough ballpark figure just to give them an idea of payments but that it should not be relied upon and the real numbers can vary widely depending on their credit, the type of loan, etc.

JASON: Yes, when it gets to detailed, it's time to turn them over to the lender. I don't want to be doling out financial advice -- that's not my area of expertise.

DAVE: Thanks for sharing your story. Our property taxes are not that high here in Virginia, but it is printed on the MLS sheet so I also tell people what the yearly taxes are and estimate the monthly payment of those as well. I do tell the clients to talk to a loan officer. If they really can't afford a home, I don't want to waste all kinds of time driving them around.

JOSHUA: De nada.

BETH: Thanks for your comments.

ADAM: Thanks for your comments. This is obviously how I would answer the question on the fly. If we're in the office, I'll have the mortgage calculator or computer with me and can give a more concrete calculated answer.

OCT

2007

I want to buy a house estimated at 300K for 350K. I have 30K to put dowm. Hows much would my payment be including taxes. inurancex, inc. I ove at 8845 Rising Cfeek Ct. LV Nevada 8914

salary 809,000

credit score 770

6% Fixed

120 per month taxes

20.00 assoc dues whihc is pad spearartely

Right Now Convetional loan at & fxlddjicama

LUCINDA: I appreciate your interest, but I am unable to provide you an accurate estimate and certainly cannot help you with Nevada homes. I'd suggest using the formula I provided in this article as a rough estimate, finding a mortgage calculator online, and contacting a local Nevada mortgage lender for more information.

Brian- Me, I'm calling the Lender......too many formulas cloud my brain :) :)

OCT

2007

KATHY: That's always the best bet.

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