How to Find Total Mortgage Cost: A Case Study
The total cost of a mortgage is determined by many factors - factors than
interact in complex ways. This case study will show you how to recognize
those factors and how to find the total cost of your mortgage.
Factors That Affect Total Mortgage Cost
To determine the total cost of a mortgage, we need to know the following:
- Mortgage attributes. For a
fixed-rate mortgage, the key attributes are the loan amount, loan
term, and interest rate. For an
adjustable-rate mortgage, other factors
lifetime rate cap,
months between rate adjustments, etc.) also come into play.
- Down payment. The larger the down payment, the smaller the total
- Discount points. Discount points are upfront fees paid to the lender. One
point equals 1% of the loan amount.
- Other closing costs. Closing costs cover a multitude of upfront expenses
(termite inspection, legal fees, document fees, survey costs, etc.).
- Private mortgage insurance (PMI). Mortgage insurance is usually
around $55 per month for every $100,000 borrowed (until the principal
on the loan falls below 80% of the home's fair market value).
- Income tax rate. Depending on your personal financial situation, you
may be able to deduct certain mortgage expenses (e.g., points and
interest expense) from your income tax.
can take all of these factors into account.
Use it to assess the total cost of your
mortgage. The following case study illustrates the process.
How to Find the Total Mortgage Cost Over the Life of the Loan
Mildred is buying a condomium for $200,000. She is making a down payment of
$20,000, so Mildred needs a $180,000 mortgage loan. Her bank charges
$1,200 per year for private mortgage insurance (PMI), until her unpaid
principal falls below 80% of the home's fair market value (i.e., below
To buy her home, Mildred decides to get an
The details of the mortgage appear below.
||Duration of starting rate:
|Starting interest rate:
||Periodic rate cap:
||Maximum interest rate:
||Months between adjustments:
Additionally, Mildred will have to pay 1 discount point (i.e., 1% of
the loan amount) plus $3,000 to cover assorted closing costs.
Mildred, who is in the 25 percent income tax bracket, wants to know the
total cost of the mortgage, before and after income tax.
To find the total cost, Mildred decides to use Mortgage Mavin's
Her first step is to describe the analysis she wants to conduct. Here's how.
- Choose "Find total mortgage cost" from the Main Goal dropdown box
of the calculator.
- In the "Options" section, check the following options:
"Show amortization schedule", "Include mortgage insurance", and
"Include tax deductions".
- Choose "Adjustable-Rate Mortgage" as the mortgage type.
The calculator then displays text boxes for the data it needs. Mildred enters
data from the above description into the calculator. The
calculator settings and data entries are shown below.
Describe the Analysis
Describe the Loan
Describe the Rate Adjustment Rules
Months before first rate adjustment:
Maximum lifetime interest rate (%):
Months between rate adjustments:
Describe the Costs Paid at Closing
Other costs and fees ($):
Enter Tax and Insurance Info
Annual mortgage insurance ($):
Appraised value of home ($):
After Mildred clicks the Calculate button, the
calculator produces a summary report that includes the following results.
|Total interest expense:
|Other loan costs (legal fees, survey fees, etc.):
|Private mortgage insurance (PMI):
|Total mortgage cost:
|Tax deduction for points:
|Tax deduction for interest:
|Total mortgage cost (after tax):
The summary report shows mortgage costs over the life of the loan
(30 years). The pre-tax total mortgage cost is $563,247.41.
However, if Mildred is able to take advantage of potential income tax deductions,
her after-tax total mortgage cost is only $476,035.56.
Over the life of the mortgage, tax deductions could save Mildred
How to Find the Total Mortgage Cost at Any Point in Time
The summary report also includes an
amortization schedule. The amortization schedule shows the
total mortgage cost for each month.
Refer to the amortization schedule to find the total mortgage cost
at any point in time. Suppose, for example, that Mildred decides
to sell her condominium after 10 years (i.e., 120 months). The
amortization schedule shows that the total mortgage cost after
120 months would be $354,399.19.