What Is Included In A Monthly Mortgage Payment?

Online Mortgage Calculators are great for giving Buyers a quick idea of what to expect for a Monthly Mortgage Payment, however, they can also create false expectations of what to expect for a Monthly Mortgage Payment. The main reason why Mortgage Calculators many times create false expeditions, is because:

• The wrong Mortgage Program is selected.
• Borrower does not input all of the necessary information.
• Online Mortgage Calculators do not always calculate Private Mortgage Insurance (PMI), or FHA Monthly Insurance Premium (MIP) correctly
• Not all online Mortgage Calculators take Homeowners Insurance or Taxes into consideration, and if they do the Borrower many times does not have a realistic expectation of what the Homeowners Insurance or Taxes will be.
• But I would say that the main reason why online Mortgage Calculators create false expectations is because Borrowers, especially First Time Homebuyers do not know What Is Included In A Monthly Mortgage Payment, so they do not know what to look out for. 

As a result a common response that I get fairly often from Borrowers when I am Pre-Approving them for a mortgage is, that the Monthly Mortgage Payment is higher than they expected. When I get that response I take time to ask them what information they put into the online Mortgage Calculator.  As we go through the information that they inputted, it soon becomes clear what they omitted, or incorrectly imputed.

The same misunderstanding can also happen if a Loan Originator assumes that the Borrower knows What Is Included In A Monthly Mortgage Payment.  So it is important for Loan Originators to take the time to explain to each of their Borrowers, not only how much they will be paying each month, but also how they arrived at that figure by explaining each of the different components that will make up their Monthly Monthly Payment.

 

A common term in the Mortgage Industry when referring to the Monthly Mortgage Payment is PITI.  PITI is what makes up the basic Monthly Mortgage Payment on every loan, even those that will not contain all of the PITI components in the Monthly Mortgage Payment, because the Borrower will be paying them separately.  However, in applying for a mortgage ALL the components will be included into the Borrowers Debt-To-Income Ratios in approving the Borrower for a mortgage.  PITI simply stands for:

 

Principal -  This is the portion of the Monthly Mortgage Payment that reduces the remaining balance of the money that is borrowed. 

 

Interest -  This represents the cost of borrowing the money, and is stated as a percentage of the outstanding balance on the loan.  On a 30 year fixed loan, the total interest is almost the same amount as the amount of money that is borrowed.

 

Property Taxes  -  This is the money that is collected each month as part of your Monthly Mortgage Payment, so that the Lender can pay the town the Property Taxes when they come due.  In most towns in Connecticut, property taxes are collected every 6 months, with the exception of one town that collects taxes every 3 months, and 6 other towns that collect taxes just once per year.  Taxes will differ from town to town, depending on the mill rate that the town sets for that year.  The mill rate is calculated as a percentage of each $1,000 that the town assesses the property value at.  Taxes are one of those items that the Borrower may elect to pay on their own, and not as part of their Monthly Mortgage Payment to the Lender.  But it is still part of the Housing Payment, and therefore included in the Debt-To-Income Ratios, and the total debt in qualifying the Borrower for a mortgage.

 

Homeowners Insurance (Hazard Insurance) -  This is the money that is collected each month as part of the Monthly Mortgage Payment, so that the Lender can pay the Homeowners Insurance Premium to the Insurance Company each year.  Homeowners Insurance is required on all loans to protect the Homeowner and the Lender for a loss, damages, theft, and liability coverage.  Homeowners Insurance just like Property Taxes can be paid separately and not included in the Monthly Mortgage Payment.  But is include in the total debt for the same reasons as stated above for the Property Taxes.

 

These are the 4 components that make up the PITI (Principle, Interest, Taxes, Insurance), but there may be other fee that could also be part of a Monthly Mortgage Payment such as:

 

Private Mortgage Insurance (PMI) or FHA Monthly Insurance Premium (MIP) -  If a Borrower makes a downpayment that is less than 20% of the selling price of the house that they purchase, they will need to pay PMI.  PMI is required by the Lender to protect the Lender in case the Borrower defaults on the loan, and the Lender has to foreclose on the property.  When a Borrower is required to pay PMI, it will be calculated as a monthly amount that will be collected each month as part of the Monthly Mortgage Payment.  A Borrower will be required to pay PMI until the Borrower has acquired 20% equity in the property on a Conventional Loan.  On a FHA Loan the Borrower will continue to pay the Mortgage Insurance Premium (MIP) each month until the Principle Balance has been reduced to 78% of the beginning loan amount, and the Borrower has been paying it for a minimum of 5 years. However, on June 3, 2013, the MIP will remain for the life time of the mortgage on 30 year fixed FHA Loans, and 11 years for most of the 15 year fixed FHA Loans.

 

Condo Fees or Homeowner Association Fee:  If the Borrower purchase a Condominium they will pay a monthly fee maintenance fee each month to the Condo Association, or Condo Management Company.  The same fee is also charged by Housing Developments that have common areas that need to be maintained.  Even though these fees are always paid separately from the Monthly Mortgage Payment, they are still part of the Housing Payment, and therefore, part of the Borrowers Debt-To-Income Ratio in qualifying for a mortgage.

 

Hopefully the above explanation helps homeowners understand better What Is Included In A Monthly Mortgage Payment.  This information should also help Borrowers to input their information more accurately into a online Mortgage Calculator if they choose to use one to get a quick idea of what their Monthly Mortgage Payment maybe.

 

 

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 Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com