What’s in Your Mortgage Payment

 In Common Questions, First-Time Home Buyers

Many people are confused about what is included in their mortgage payment.  Here’s what you need to know.

A typical mortgage payment includes the following:

  • Principal: When you borrow money to buy a house, you have to pay it back, with interest.  The principal is the portion of the money you borrowed that you are required to pay back each month.
  • Interest: Each month, you are charged interest on the money you borrowed.  The interest charged each month is calculated by taking the remaining principal balance, multiplying it by the interest rate, and then dividing by 12.  As an example, if the remaining principal balance on your mortgage is $100,000 and the interest rate is 3%, you multiply $100,000 by 3%, and then divide by 12.  The interest payment would be 100,000 x 3% / 12, or $250.
  • Property taxes: With most mortgages, you pay 1/12th of your annual property taxes to the lender each month, and then when those taxes are due, the lender pays them for you.
  • Homeowner’s insurance: Just as you pay 1/12th of your taxes to the lender each month, you also pay 1/12th of you annual homeowner’s insurance premium to the lender each month, and then when that premium is due, the lender pays the premium for you.

You may have heard lenders refer to the PITI payment.  That stands for Principal, Interest, Taxes, and Insurance, and includes all of the things mentioned above.

Some mortgages require mortgage insurance.  If you are required to pay mortgage insurance, that will also be included in your monthly payment. 

The property taxes, homeowner’s insurance, and mortgage insurance (if applicable), are held by the lender in an account known as an escrow account.  It is sometimes possible to pay the taxes and insurance yourself, rather than paying them to the lender, but there are certain requirements that must be met before this is allowed.  If that’s an option you would like when you are getting a mortgage, check with your lender to see if your mortgage program allows you to waive the need for an escrow account.

Some properties have HOA fees.  The HOA fees are typically paid directly to the HOA management company, and are not included in the monthly mortgage payment.

The rules mentioned above apply to most, but not all mortgages.  For example, some mortgages only have an interest payment, and don’t require a monthly principal payment, although you do still have to pay the principal back eventually.

If you have any questions about mortgage payments or anything else related to a mortgage, contact us today.

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