How do I calculate my mortgage payment?
Most people don't try to calculate their mortgage payment by hand, since it can be a pretty complicated process, and instead use a handy mortgage calculator like this one. But, if you're financially curious, the formula looks like this:
Your basic mortgage payment, made up of just your principal and interest charges (often known simply as "PI" or "P+I") is the result at the end of this calculation. Although the payment is the same each month, the allocation of interest and principal is different each month, with increasingly more principal being added into the payment as your balance decreases and interest charges become less.
Your payment is based on three simple things: how much you borrow, at what rate you borrow it, and for how long you need to pay it back. However, your actual monthly mortgage payment consists of more than just P+I.
Mortgage payments typically include principal, interest, real estate taxes, and homeowners insurance, commonly called PITI (see how that works?). Sometimes, extra fees like HOA assessments are also included in the mortgage payment, as well as extra insurance for related natural disasters. In addition, if you have a smaller than 20% down payment like most Americans, you will likely also have to pay for mortgage insurance, such as private mortgage insurance (PMI) on a conventional loan. If you get an FHA loan, you'll pay a mortgage insurance premium (MIP).
To calculate your new mortgage with these additional expenses included, just click "show additional inputs" on the mortgage calculator above and add your estimated figures. It will get you a very close estimate of what to expect.
Things to know before buying a house in Alabama
Alabama generally has a very reasonably priced real estate market, though some cities are appreciating much faster than others. Alabama property taxes are also some of the lowest in the nation. The average Alabama homeowner pays 0.33% of their home's assessed market value in property taxes each year, meaning the average home assessed at $119,600 would only be subject to $398 in taxes. Even the highest tax rate for a county in the state is just 0.47%
Although Alabama hasn't yet suffered significantly from temperature changes caused by climate change, experiencing no net warming since the beginning of the 20th century, it is subject to some very violent weather. Both tornadoes and hurricanes are common, causing significant property damage most years, and earthquakes are not unusual in the upper half of the state.
You may be money ahead if you get coverage beyond your basic homeowners insurance policy, such as flood insurance, for the specific location where you'll be moving. Ask your insurance agent what's appropriate, even if it's not required. You can also plug that number into the Alabama mortgage calculator to help give you a better estimate of your overall payment.
Tips for first-time home buyers in Alabama
Alabama has programs available through the Alabama Housing Finance Authority (AHFA) to assist residents in becoming homeowners. Here's a rundown of the two main programs, as well as links to find out more information.
Step-Up
The Step-Up program is designed specifically for moderate-income households who need help with a down payment for their home. The funds are a loan, written as a 10-year second mortgage, which must be repaid. Assistance is capped at 4% of the sales price, or $10,000, whichever is less.
To qualify for this program, Alabama residents must:
- Earn less than $159,200 per year per household.
- Have a credit score of 640 and debt-to-income ratio below 45%
- Complete a homeownership education course
- Qualify for an HFA Advantage conventional, FHA, or VA loan through a participating lender
Affordable Income Subsidy Grant
Some borrowers may additionally qualify for a grant to help cover closing costs through the Affordable Income Subsidy Grant. This can be used in conjunction with the Step-Up program. Income limits apply, and recipients must also meet all the requirements of the Step-Up program, with the exception of income.
The relative income of the borrower versus their area median income (AMI) for the location of the house they hope to own will determine how much of a grant they will receive. Borrowers at or below 50% AMI get a grant for 1% of the loan amount; borrowers at or below 80% AMI are eligible for 0.50% of the loan amount.
Advice for all first-time borrowers
Whether you qualify for a home mortgage purchase program in Alabama or not, you can still apply for other loans with appealing terms for first timers, like FHA loans or conventional loans. Both have low down payment requirements, making them easier to secure, and can be used on a vast array of homes.
In order to qualify for a home loan, you'll want to work hard to make yourself into the best candidate for a mortgage lender to approve. Here are a few tips:
- Boost your credit score with on-time payments and low credit card utilization
- Pay off debt to improve your debt-to-income ratio
- Secure a steady job (or don't leave your current job)
- Save for both closing costs and your down payment
In addition, guard your credit carefully by not opening any new accounts or applying for credit too soon before your loan application. Each time you apply or open a new credit account, your credit will take a little hit. Inquiries take two years to fall off your credit report, so plan accordingly.