Unlike rent payments, mortgage payments are made up of several components. Determining the length of time it will take to pay off your house loan and the total cost over time requires an understanding of the components of a mortgage payment. Furthermore, staying on top of your mortgage each month can be achieved by understanding when and how to make payments.
Letâs take a look at what goes into your mortgage payment and your options for paying it off.
So you’ve taken the plunge and bought your dream home. Congratulations! But with homeownership comes the responsibility of making regular mortgage payments. But what precisely are you paying for each month? To help you understand, your mortgage payment consists of three main parts:
1. Principal: This is the amount you borrowed from the lender to purchase your home. Each month, a portion of your payment goes towards reducing this principal amount. The faster you pay down the principal, the quicker you’ll own your home free and clear.
2. Interest: This is the cost of borrowing money from the lender. It’s calculated as a percentage of the outstanding principal balance and is typically the largest portion of your monthly payment, especially in the early years of your mortgage. As you pay down the principal, the interest portion of your payment will decrease.
3. Taxes and Insurance: Generally speaking, your mortgage payment also includes a sum for homeowner’s insurance and property taxes. Usually, these expenses are escrowed, which means that the lender receives them in addition to your mortgage payment and pays them afterwards on your behalf. This helps you avoid any potential late fees or penalties and guarantees that your taxes and insurance are paid on time.
Bonus Round: PMI (Private Mortgage Insurance)
If you put down less than 20% on your home purchase, you may also be required to pay private mortgage insurance (PMI). PMI protects the lender in case you default on your mortgage. Once you’ve built up 20% equity in your home you can typically cancel PMI and save yourself some money on your monthly payments.
Understanding Your Mortgage Breakdown:
Making financial decisions with knowledge of your mortgage payment breakdown will assist you. For instance, if you want to save money, you might think about paying more in principle to get your mortgage paid off sooner. Alternatively, you might be able to work with your lender to change the terms of your loan if you’re having financial difficulties.
Remember: Every mortgage is different, so it’s important to carefully review your loan documents and understand the specific terms of your mortgage. If you have any questions, don’t hesitate to contact your lender or a financial advisor. They can help you understand your mortgage and make sure you’re on track to achieve your financial goals.
See What You Qualify For
PITI is an acronym for the four main components of a mortgage payment: principal, interest, taxes and insurance. Together, they make up what you pay on your mortgage every month. When looking for a home, knowing your potential PITI helps you and the lender figure out how much you can afford.
Let’s examine the principal, interest, taxes, and insurance—the four primary parts of your monthly mortgage payment—in more detail.
Your basic mortgage payment has two components: principal and interest. Principal is the total loan amount you borrowed to buy your home. Itâs factored into your monthly payment and paid off over the loanâs repayment term.
The amount of principal you pay off each month when you start making monthly mortgage payments is quite small. As the loan ages, more of your monthly payment will go toward the remaining principal amount.
The portion of the principal that you pay your lender as a fee for extending credit to you is known as interest. The amount of your monthly mortgage payment applied to interest will decrease as you pay down your loan. To further reduce the interest you pay each year, you might also be eligible to deduct mortgage interest from your taxes.
No matter what happens to the real estate market, the interest rate you pay on a fixed-rate mortgage will remain constant for the duration of the loan.
Wherever you live, youâll pay a property tax on your home. Your payment is determined by a percentage of the value of your property, which varies annually. The actual amount you pay is determined by a number of factors, such as local tax rates and the assessed value of your home. Typically, every county has its own taxation system.
Your property taxes will go up if your property’s assessed value—which isn’t always the same as its market value—increases.
There are two main types of insurance that can factor into your mortgage payments:
- Homeowners insurance: In the event of a natural disaster or an accident on your property, homeowners insurance acts as a safety net to safeguard your house and finances. In the event of an incident, the cost of repairs to return your property to its pre-event value is usually covered by your homeowners insurance.
- Mortgage insurance: Mortgage insurance does not apply to all homeowners; however, if you make a down payment on your home that is less than 2020% of the total, you will most likely be required to pay the premium. Mortgage insurance is necessary for lenders to protect their investment in the event that a loan defaults. You may be required to pay a mortgage insurance premium (MIP) or private mortgage insurance (PMI) depending on the type of home loan you have.
To cover these expenses, the insurance component of your mortgage payment and your property taxes might be deposited into an escrow account.
How Mortgage Payments Work
Now that you know what goes into each payment, itâs time to start paying off your mortgage:
Your initial mortgage payment is due the first full month following closing once the mortgage loan application process is complete. For instance, your closing costs will pay for the interest you would have to pay for the remainder of June if you close on June 9. After that, your payment for July will be due on August 1.
While monthly mortgage payments are standard, your lender may allow you to opt for biweekly payments. A biweekly payment schedule may make your payments more manageable because theyâre cut in half.
How To Calculate Your Mortgage Payment
FAQ
What 3 costs contribute to the total cost of a mortgage?
What makes up a mortgage payment?
How many different costs are in a mortgage payment?
Your mortgage payment may actually be made up of four different costs. When you borrow money to buy a home, you will have a monthly mortgage payment to make. But it may come as a surprise that your payment can actually be made up of four separate costs. It’s important to understand each of the individual components of your mortgage payment.
What costs are reflected in my monthly mortgage payment?
There are seven costs generally reflected in your monthly mortgage payment: principal, interest, escrow, taxes, homeowners insurance, mortgage insurance, and homeowners association or condominium fees. Let’s take a closer look at each.
What components make up a mortgage payment?
Understanding the components that make up a mortgage payment can help you choose the mortgage option that is best for you. There are seven costs generally reflected in your monthly mortgage payment: principal, interest, escrow, taxes, homeowners insurance, mortgage insurance, and homeowners association or condominium fees.
What is a basic mortgage payment?
Your basic mortgage payment has two components: principal and interest. Principal is the total loan amount you borrowed to buy your home. It’s factored into your monthly payment and paid off over the loan’s repayment term. When you begin making monthly mortgage payments, the amount of principal you pay off each month is relatively low.