## How much does that home loan actually cost?

Calculating the cost of a home loan.

Homeownership is a wonderful experience that approximately 4 million people in the US take part in each year. Of those 4 million people, approximately 80 percent qualify and obtain a mortgage with a lender. A mortgage is money borrowed from a lending institution, credit union or mortgage broker, with an interest charge for the purposes of purchasing a home. Typical mortgage loan terms in the United States range between 15 and 30 years. When prospective borrowers look to qualify for a mortgage, their credit score is a primary factor used to determine the interest rate, the price for the privilege of borrowing money on the home they qualify for.

Before a potential homeowner looks to purchase a home, Michigan State University Extension recommends that the buyer consider the costs of having that home. Approximately 69.48 percent of a monthly mortgage payment is directed to pay for the interest on the loan, not to bring down the principal balance. An easy method for determining how to calculate the cost of a home loan is to use a factor table to determine what the monthly Principal and Interest payment (P&I) will be. A factor table is used to determine what the monetary cost is for every thousand dollars borrowed on a loan based on the interest rate and loan term. For example, using a standard factor table, a new borrower looking to determine the monthly costs to purchase a \$150,000 home, at a 4.75 percent interest rate for 30 years will use the following calculation:

[(Purchase Price/1000) * Sample factor for interest rate and loan term] = Monthly Principal & Interest Payment

[(\$150,000/1000) * 5.21647)] = \$782.47

If the above number were multiplied by the number of months the loan would be carried (i.e. 30 years = 360 months), one could determine how much money they would pay towards principal and interest over the life of the loan. For this example, a \$150,000 home loan would cost \$281,698.38 over 30 years. The interest payments on the loan equal \$131,689.38. This amount does not include property taxes, homeowners insurance nor association dues that are in addition to the P&I payment.

If a borrower wanted to determine what the monthly P&I payment would be on a 15-year mortgage, the above calculation could be used, subbing in the sample factor for a 15-year home loan and multiplying the monthly P&I payment by 180 months.

Now, more than ever, it is important for potential homebuyers to be aware of how much a loan will cost over its lifetime. While the monthly cost can look appetizing and be one reason for obtaining homeownership, it should not be the only factor. Determining how much of your hard-earned money will go towards a mortgage loan may help in determining how fast one pays off the loan as well as make educated decisions about borrowing. Knowing what you will pay over the long haul may be the difference between accepting a 15-year mortgage over a 30-year mortgage, or a \$100,000 home over a \$150,000 loan.