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 (periodic rate cap, lifetime rate cap, months between rate adjustments, etc.) also come into play.
Down payment. The larger the down payment, the smaller the total mortgage cost.
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.

This site's mortgage calculator 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 $160,000).

To buy her home, Mildred decides to get an adjustable-rate mortgage. The details of the mortgage appear below.

Basic Features		Rate Adjustment Features
Mortgage type:	Adjustable-rate	Duration of starting rate:	12 months
Starting interest rate:	6 percent	Periodic rate cap:	0.5 percent
Loan amount:	$180,000	Maximum interest rate:	10 percent
Loan term:	30 years	Months between adjustments:	12 months

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 mortgage calculator. 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

Main goal:

Options:

Show amortization schedule
Include mortgage insurance
Include hazard insurance

Include property tax
Include prepayments
Include tax deductions

Describe the Loan

Mortgage type:

Loan term (in years):

Loan amount ($):

Interest rate:

Describe the Rate Adjustment Rules

Months before first rate adjustment:

Periodic rate cap (%):

Maximum lifetime interest rate (%):

Months between rate adjustments:

Describe the Costs Paid at Closing

Down payment ($):

Points (%):

Other costs and fees ($):

Enter Tax and Insurance Info

Annual mortgage insurance ($):

Appraised value of home ($):

Income tax rate (%):

After Mildred clicks the Calculate button, the calculator produces a summary report that includes the following results.

Mortgage Attributes	Values
Pre-Tax Analysis
Principal paid:	$180,000
Total interest expense:	$347,047.41
Down payment:	$20,000
Points:	$1,800
Other loan costs (legal fees, survey fees, etc.):	$3,000
Private mortgage insurance (PMI):	$11,400
Total mortgage cost:	$563,247.41

After-Tax Analysis
Tax deduction for points:	$450
Tax deduction for interest:	$86,761.85
Total mortgage cost (after tax):	$476,035.56

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 about $87,000.

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.