When determining your budget for buying a home, it's important to look past the sticker price. After all, unless you're buying a house with cash, the amount of money you'll pay on your home loan will be much more when you factor in the interest.
And, if you use a fixed-rate mortgage, you can determine how much your monthly payment will be ahead of time – as well as the total amount you'll pay for the home. This can be helpful to ensure the payment fits into your budget.
Let's take a look at how much you'll pay for a $1 million home with a few popular types of mortgages.
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What would my monthly mortgage payment be for a $1 million home?
There is a simple formula for figuring out how much your monthly mortgage payment will be, but there are three variables you need to know: your interest rate, the term of your loan and the down payment amount.
For the examples outlined below, we'll assume a 20% down payment, which amounts to $200,000 on a $1 million home. That means you are borrowing $800,000 in total with a mortgage. Putting down 20% also means you won't have to buy private mortgage insurance (PMI).
Example 1: 30-year fixed-rate mortgage at 6.95%
According to the New York Times, more than 95% of all mortgages have a fixed rate, and about 75% of those have 30-year terms. As of December 29, 2023, the national average interest rate for this type of mortgage is 6.95%. That won't necessarily be the rate you get, however. Your mortgage company will use factors like where you live and your credit score to determine your rate.
If you borrow $800,000 with a 30-year fixed-rate mortgage at a rate of 6.95%, you'd have a monthly payment of $5,295 on the principal and interest of the loan. This is just the payment on the loan, though. You'll also have to pay homeowners insurance and property tax, which will vary based on where you live.
You'd also pay $1,106,904 in interest on this loan, for a total of $1,906,904. And, if you add in the $200,000 down payment, you would end up paying a total of $2,106,904 for this home.
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Example 2: 15-year fixed-rate mortgage at 6.35%
A 15-year fixed-rate loan instead of a 30-year mortgage can save you money on interest in the long run, but you will have a higher monthly payment to manage. The national average interest rate for 15-year fixed-rate mortgage loans is 6.35% as of December 29, 2023.
If you buy a $1 million home with a $200,000 down payment and finance the remaining $800,000, your monthly mortgage note would be $6,903. Remember, though, that there are fees like homeowners insurance and property taxes to consider when working your housing costs into your budget.
With this loan, you'd pay a total of $442,558 in interest, which results in a total of $1,242,558 paid on the loan. If you add in the down payment, the house would cost you a total of $1,442,448 over 15 years.
Example 3: Adjustable-rate mortgage
Another type of mortgage is an adjustable rate mortgage, commonly referred to as an ARM. With an ARM, there is a fixed-rate period at the start of the loan. After the fixed-rate period ends, your interest rate will be adjusted on a set schedule.
ARMs are generally described using two numbers: one that indicates the fixed-rate period and the other indicates how often the rate can be adjusted. For example, if you have a 7/1 ARM, the fixed-rate period lasts for seven years. Once the fixed-rate period ends, the interest rate can adjust up or down once per year.
With an ARM loan, you are only able to determine your monthly payment for the fixed-rate period. This type of loan could save you money in the long run if rates decline, but there is also the risk that rates will go up.
The bottom line
The amount you pay monthly for your mortgage depends on the term, the interest rate and the amount of your down payment. Before you take out a mortgage, try to determine how much you'll be paying each month and make sure you can fit that payment into your monthly budget.
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