You can leverage your real estate investments by borrowing money to afford a higher purchase price. Knowing how to calculate a mortgage payment is important to make significant business decisions when adding to your real estate portfolio.
Typical Costs Included in Your Mortgage Payment
Your mortgage payment involves many costs, not just the amount you borrow to invest in a home. Some variables you may control, but others are fixed monthly expenses you must include in your mortgage payment, such as monthly interest, taxes, and insurance.
Principal
The mortgage principal is the loan amount you borrow to buy a home. To determine the loan’s principal, first determine the size of the down payment you’ll make on the property.
For example, if you’re considering a property that costs $300,000 and has a $100,000 down payment, your loan principal would be $200,000, as that’s how much you need from the bank to complete the transaction.
Interest
Interest is the fee you pay to borrow the money. You pay an annual interest rate but make monthly payments with a monthly interest rate (the annual rate divided by 12). The interest rate on investment properties is usually slightly higher than the rate lenders give borrowers purchasing a primary residence because there is a higher risk of default on investment properties.
Your initial mortgage payments will be more interest than principal, but as you pay the principal balance down, the interest paid in each payment decreases. You can evaluate interest savings by shopping around for the best loan program.
Taxes
Property taxes are a significant part of your mortgage payment, as they are required to own a home. Since you are the property owner, you are responsible for paying the property taxes. You may set up an escrow account and include one-twelfth of the annual tax bill in your mortgage payment or pay the property taxes yourself, but you should still consider them a part of your mortgage payment to…