Becoming a Homeowner …
Understanding Your Mortgage Payment
It’s important to understand what a mortgage payment is, right from the start.
A mortgage payment is made up of several parts.
1. The principal. This is the amount of money that goes towards paying down the balance owed on the house.
2. The interest. The interest portion of the payment is larger than the principal, in fact it's the largest portion of the payment, but it decreases and the principal portion increases as the months go by.
3. Property taxes. Each month you pay about 1/12th of the yearly tax bill on your property to the mortgage company. They will keep the funds in an escrow account and pay the taxes when due.
4. Insurance. Each month you pay about 1/12th of the yearly homeowner’s insurance cost to the mortgage company. They will pay the insurance bill when due.
Together, these four are referred to as ’PITI’.
5. Mortgage insurance. This is insurance that protects the lender, should you default on the loan. It does not protect you. It is required on all loans financing more than 80% of the value of the house.
HOA Fees: If there is a homeowner’s association in your neighborhood there will be a fee, it is usually monthly although some small fees are quarterly. They are usually paid separately from your mortgage payment itself, but it may be over $200 in some cases, so it’s a number you should definitely keep in mind when thinking about your payment.
Be careful about using online mortgage payment estimators,
they often only include the principal and interest,
and can be very misleading.
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