Calculating Your Monthly Mortgage Payment

• To determine what your monthly payments will be, use the following formula, where P is the principal, R is the annual interest rate divided by 12 and T is the term of the loan in months: monthly payment=P*(R+(R/((R+1)^T-1))). If you take out a 30-year mortgage for $175,000 at a 5.7 percent annual rate, your monthly payment would be $1,015.70.
  
  

Private Mortgage Insurance

• You will be required to buy private mortgage insurance, or PMI, to protect the bank against default if your down payment is less than 20 percent of the purchase price of your home. The cost is based on the amount of the loan--usually between 0.5 percent and 1 percent of the loan amount annually--and is added to the monthly payment.
  
  

Points

• To reduce the interest rate on your loan, you can pay discount points upfront. Each point costs 1 percent of the total amount of the loan. A discount point generally decreases the interest rate by about 0.25 percent. The break-even point usually is about five years--if you plan to stay in your home with your current mortgage for longer than five years, it may be worth it to pay discount points to reduce your monthly payment.
  
  

Lengthen the Term

• If making monthly payments will be a struggle, consider taking out a loan with a longer term. That will reduce your monthly payment, but you will pay more in interest over the life of the loan. In addition, most lenders charge higher interest rates for longer-term loans.
  
  

Check Your Credit Report

• Before applying for a mortgage, order a copy of your credit score from one of the three major credit bureaus--TransUnion, Equifax or Experian. Check the report to make sure there are no errors. If there are, contact the credit bureau to fix the report and improve your credit score. Credit scores of 720 or higher usually will qualify for better interest rates.