A mortgage is a long-term commitment that can land you in a financial bind if you’re not careful. So, before taking the plunge, it’s essential to know whether you can afford your potential home loan.
Payments on a $150,000 mortgage can vary significantly depending on a variety of factors, ranging from the down payment amount to the interest rate. By learning how to calculate your monthly payments in advance, you’ll have a better idea of whether homeownership can comfortably fit within your budget.
The cost of taking out a $150,000 mortgage can vary drastically, depending on several factors, such as the repayment term, interest rate, and whether you need to pay private mortgage insurance. Regardless of the total loan amount, your monthly payments will typically consist of three main components: principal, interest, and escrow.
Let’s say you take out a $150,000 mortgage with a 5.00% APR (the interest rate accounting for fees); here’s how your monthly payment and borrowing costs could differ between a 15-year and a 30-year loan term:
| 15-year term | 30-year term | |
|---|---|---|
| Monthly mortgage payment | $1,469 | $1,088 |
| Total homeowners insurance | $15,000 | $30,000 |
| Total property tax | $36,000 | $72,000 |
| Total interest paid | $63,514 | $139,883 |
Note: To get the figures above, we assumed that you have no private mortgage insurance or PMI, a property tax of $2,400 per year, and an annual home insurance cost of $1,000.)
Related: Learn more about getting a home loan on Credible.com
A down payment is the amount you pay up front when taking on a home loan. The larger your down payment, the lower your monthly mortgage payments tend to be since you’ve already paid a portion of the home price at closing. Generally, a minimum of 20% is necessary to avoid having to purchase PMI.
If you put a 20% down payment on a $188,000 property (or $37,600), for example, you would be left with approximately a $150,000 mortgage — and no need for PMI.
But what if you put less than a 20% down payment toward a home purchase? According to the Urban Institute’s Housing Finance Policy Center, PMI ranges from 0.58% to 1.86% of the original loan amount, depending on your credit score. At those rates, PMI on a $150,000 mortgage would cost $870 to $2,790 a year ($72.50 to $232.50 per month).
Private mortgage insurance is a type of insurance that conventional mortgage lenders require you to pay when putting less than 20% down on a home. This insurance protects lenders if the borrowers default on the loan.
The most common way to pay for PMI is by adding it to your monthly mortgage amount. However, some lenders might allow you to make a one-time PMI payment, which is done up front at closing.
To avoid PMI payments, aim to put more than 20% down on your property. Another way to bypass PMI is by taking advantage of government-backed loans like USDA and VA loans if you qualify. These loans typically require little to no down payment and won’t need you to pay private mortgage insurance.
Commercial banks and credit unions are two of the most common places to get a mortgage. In addition to conventional lenders, online mortgage companies, such as Quicken Loans and LoanDepot, also offer home loans with competitive rates and repayment terms.
Related: Learn more about getting a home loan on Credible.com
Are you looking to make the move from renting to buying but feeling overwhelmed by the mortgage application process? Don’t worry. Here’s a step-by-step guide on how to apply for a mortgage and finance your potential property.
- Determine how much house you can afford
Begin by analyzing your monthly earnings and expenses to see if you have enough disposable income to cover your mortgage payments. Then, use an online mortgage calculator to estimate your potential mortgage payment based on factors like the total loan amount, term length, and APR you might qualify for.
- Check your credit report
Your credit score can significantly impact the interest rate you receive from a mortgage lender. Generally, the higher your credit score, the lower your interest rate.
So, before applying for a mortgage, be sure to get an accurate and updated snapshot of where you stand in terms of your credit health. You can request a free copy of your credit report from all three major credit bureaus at AnnualCreditReport.com and monitor your credit scores through the three major credit bureaus, third-party services and, potentially, your current bank or financial institution.
- Get pre-approved
The mortgage pre-approval process may vary slightly from lender to lender, but generally, it involves a credit check, a short loan application, and a review of your financial records. If you’re pre-approved, the mortgage lender will send you a pre-approval letter stating that they’re tentatively willing to lend you up to a maximum amount.
Since a pre-approval is a non-binding agreement, you can switch lenders before officially taking out a loan. Plus, getting pre-approved shows the seller you’re a serious buyer and can help you stand out in a competitive housing market.
- Compare APRs from multiple lenders
After receiving multiple lenders’ pre-approvals, compare their offered APRs carefully. APR, which stands for annual percentage rate, represents the annual cost of borrowing a mortgage. It takes into account the interest rates and any additional fees associated with taking out a home loan.
Though comparing APRs across multiple lenders may take time and effort, it’ll save you a considerable chunk of change in the long run.
- Submit your mortgage application
Once you’ve thoroughly researched your options and decided on a lender, complete a full mortgage application. Though you might have already completed most of this process during the pre-approval stage, your lender may need some additional documents and updated information from you to verify your eligibility.
If there’s anything you’re unsure of during the loan application process, don’t hesitate to contact your lender for clarification.
After submitting your mortgage application, a loan processor will get all your documents in order, and an underwriter will examine your finances and determine whether to formally approve you for the mortgage.
- Prepare for closing
If your mortgage application is approved, it’s time to prepare for closing. Closing, also called settlement, is typically the last step in the mortgage loan transaction. At this stage, you’ll be invited to attend a closing meeting at the title insurance company or the attorney’s office.
One of the key documents you’ll sign during this meeting is the closing disclosure form, which provides final details about the loan, such as the projected monthly payments, loan term, and closing costs.
Closing costs typically range from 2% to 5% of the total loan, depending on your mortgage lender and loan type. If you take out a $150,000 mortgage, your closing costs could be anywhere from $3,000 to $9,000.
- Get the keys
Since the closing of your mortgage and the closing of your home purchase generally occur simultaneously, you should receive the keys to your dream abode on the closing day after all documents have been signed.
Now that you have the keys, you can move in, decorate, and settle comfortably into your new space. However, remember that homeownership comes with the responsibility of making mortgage payments on time. Failure to pay these monthly installments could result in losing the property you’ve worked so hard to acquire.
Before applying for a mortgage, be sure you’re aware of the costs that come along with it, including the closing costs, monthly payments, and total interest due over the life of the loan.
For example, if you take out a $150,000 mortgage on a 15-year term with an APR of 6.00%, your monthly payment would be $1,549. And over those 15 years, you’d shell out $77,841 in interest.
With a 30-year mortgage at the same amount and rate, your monthly payment would decrease to $1,182, but your total interest would increase to $173,757 at the end of those 30 years. If your down payment was less than 20%, you might also need to pay PMI, which could add a few hundred dollars to your monthly bill.