Money Management

Mortgage payments often include more than just principal and interest. Learn more here about what goes into a monthly mortgage payment. [[{“value”:”

If you are thinking about buying a house, you need to be prepared to take on monthly payments to do it. Most people don’t have the cash to purchase a property outright so they need to get a mortgage to buy the property. Regardless of whether you have a home loan or not, you’ll still have some costs to incur for things like taxes and insurance.

You’ll ideally want to make sure your monthly housing costs don’t exceed 30% of your income — otherwise, you may not have enough money for other goals you need to accomplish to have a secure future and avoid debt. To ensure you stay within this recommended limit, you’ll need to know how to calculate the size of your mortgage payment.

Here’s how you can do that.

Figure out your principal and interest payments

When you make your monthly mortgage payment, the money from that payment goes toward covering:

Principal: This is the initial amount of money the lender actually gave you. As you pay down your principal, you owe less and have a larger ownership (equity) stake in your house.Interest: This is the cost of borrowing. Any money paid toward interest doesn’t reduce your balance. It goes to the lender to pay it for giving you the money.

When you borrow money, the bank calculates exactly how much you have to pay each month in principal and interest to fully pay off your debt by the due date. Most commonly, the goal would be to pay off your mortgage loan in either 15 or 30 years, since those are the two most common mortgage terms.

There are plenty of mortgage calculators online you can use to calculate principal and interest. The amount due for these will depend on your interest rate (the specific amount paid for borrowing), loan term, and total amount borrowed. As the table below shows, these factors can all make a big difference.

To figure out how much your interest payments will be with different loans, consider the amount you want to borrow, the length of your loan term, and the mortgage rate your lender offers. With this information, you can use an online mortgage calculator to find out exactly how much principal and interest will be.

Add in taxes and insurance

Many mortgage lenders also require you to pay taxes and insurance as part of your monthly mortgage payment. They calculate the annual cost, divide it by 12, and collect that amount monthly. The money can then be put into an escrow account so it’s ready to be used to pay for these expenses when they come due.

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You can find out how much taxes are on a property by doing a parcel search with your local property appraiser or department of revenue for your country. Searching for the address should give you these details. And you can get homeowners insurance quotes online by inputting the property address with different insurance companies. You can also ask the current owners about what taxes and insurance costs they’re paying.

Just be aware that when the property changes hands, your taxes could go up because the property will usually be reassessed to determine its current market value. Also, any exemptions the prior homeowner had will be removed when the house is sold. But you can still get a fairly good idea of what you’ll likely need to pay.

By taking these steps, you can determine if a given home is likely to be affordable for you or not. You could really come to regret buying a house that has a monthly payment that’s too high, so you may want to “practice” making the larger mortgage payment before you commit. To do this, just transfer any extra money the mortgage will cost above the amount you’re currently paying into a savings account. If you do this for a few months and it doesn’t bust your budget, the home loan should hopefully be affordable to you over the long haul.

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Do you feel like it’s too late to open a 529 plan for your child? Think again! Check out the myths and realities of 529 college savings. [[{“value”:”

529 college savings accounts are one of the best ways to save and invest for your children’s future college expenses. 529 plans are offered by 49 states plus the District of Columbia. These tax-advantaged accounts allow your investments to grow without capital gains taxes, provide tax-free withdrawals for qualified education expenses, and they can even offer some state income tax deductions for residents of certain states.

With the cost of college skyrocketing year after year, many families might feel overwhelmed. It might seem impossible to pay for future college tuition costs. The truth is: 529 plans can help. Depending on your child’s age and your personal finances, you still might have time to save a meaningful amount of money in a 529 plan.

Let’s look at a few of the biggest misunderstandings about 529 plans, compared to the reality of saving for college.

1. Myth: It’s too late to open a 529 plan after your child reaches a certain age

Reality: It’s never “too late” to save for college in a 529 plan. Even if your child is already a senior in high school, you can still put money into a 529 account. Or if your student is already attending college, some states allow you to put money into a 529 plan and withdraw money to pay for college expenses in the same year.

2. Myth: You get a federal tax deduction for 529 plans

Reality: Sorry, there is no federal tax break for putting money into 529 plans. These plans are managed by state governments, so each state gets to decide whether to offer a state-level income tax break. And some states like Florida and Texas don’t have state income taxes.

Some states that have income taxes will allow residents to get a deduction for the money contributed to a 529 plan. But even in states that charge state income taxes, you’re not guaranteed to get a tax break for your 529 contributions. For example, California does not provide any state tax deductions for contributions to California’s ScholarShare 529 plan. But my home state of Iowa does.

3. Myth: 529 plans can only be used for four-year colleges and universities

Reality: You don’t have to go to a four-year school or an in-state school. The money saved in a 529 account can be used to pay for a wide range of private or public higher education programs, including two-year community colleges, vocational programs, some apprenticeships, and some international institutions.

Check with your state 529 plan to make sure your child’s chosen school or education program is accredited and eligible for U.S. Department of Education student aid programs. Qualified education expenses for 529 money include tuition, books, fees, technology and software, some room and board expenses, and up to $10,000 of the account beneficiary’s loans for education.

4. Myth: 529 plan money is “use it or lose it”

Reality: Even if your child chooses not to go to college or pursue eligible vocational training, you still have options with your 529 plan money. Here are a few options for unused 529 funds:

Switch the 529 plan to the name of a different beneficiary in your family (such as the beneficiary’s sibling, parent, first cousin, or future child).Withdraw the money for non-qualified education expenses — but you will have to pay complicated tax penalties: a 10% federal tax penalty plus federal income taxes on the plan’s earnings. If you got a state tax deduction for your 529 contributions, you might also owe extra state income tax in case of non-qualified withdrawals.Roll over the money into a Roth IRA under your child’s name — this is a new rule starting in 2024, but it’s limited to $35,000 of money and your 529 plan must have been open for at least 15 years. You can roll over the full IRA contribution limit per year ($7,000 for 2024) for a maximum of $35,000, or until you deplete the 529 account.

5. Myth: Only parents can put money into a 529 plan

Reality: Anyone can open a 529 plan for any beneficiary. Parents are likely to do the heaviest lifting when saving for college, but grandparents can open a 529 plan for their grandchildren too. Family members and friends are also welcome to open a 529 plan for their favorite future college student, or contribute money to a 529 plan owned by someone else.

In this way, 529 plans are a flexible way to team up with your loved ones to help save for college. But check with the rules for your state’s 529 program. If you want a state tax deduction, in some states, you might need to be the 529 account owner, not just contribute to your family member’s account.

Bottom line

529 plans are a flexible, tax-advantaged way to save and invest for college for your child or other loved ones. You won’t get a federal income tax deduction in the same way as a traditional IRA, but you can get tax-free investment growth. And as long as you use the 529 account money for qualified education expenses like tuition and room and board, you won’t owe any taxes on the withdrawals.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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