What’s in a Mortgage Payment?
If you are a first-time homebuyer, the prospect of buying a home is an exciting one. You are finally ready to say good-bye to your landlord and to have your monthly payment go to something you can call your own. But that monthly check covers more than just paying for your new abode. Here’s what’s included in your monthly mortgage payment:
Principal: This part of your mortgage payment goes toward paying down the balance of your home. If you have a fixed rate loan, this amount won’t change over time, but the percentage of the payment that goes toward principal instead of interest will increase over time. In the early years of your mortgage, you’ll pay a lot toward interest, but on the back end of the loan, the reverse is true.
Interest: Each monthly payment includes interest, or the cost of borrowing money. In a fixed rate loan, you will pay the same interest rate over the life of your loan. In an adjustable rate mortgage, that interest rate will fluctuate based on the market and according to the terms of your loan.
Taxes: In many cases, your lender will collect money toward your annual property tax bill and hold that amount in escrow until your taxes come due. Each monthly payment will include 1/12 of your annual property tax bill.
Homeowner’s Insurance: Your mortgage lender will collect 1/12 of your annual homeowner’s insurance premium with each monthly mortgage payment. Not all mortgage lenders will require this, but many do so they can ensure your interests – and theirs – are protected should something happen to your home.
Mortgage insurance: If you are making a down payment that is less than 20%, your lender may require you to have mortgage insurance to protect them should you default on your loan.
Have questions? An experienced Realtor® or mortgage lender can help!