You know you must pay your mortgage every month when it is due. But do you actually know what you are paying? How is a mortgage payment broken down? Do you know what is included in the amount owed?
When buying your property, you likely spent a lot of time going over all sorts of documentation for your new loan. There were likely a few changes along the way, too. Or maybe you are getting ready to go through it all now. Either way, it’s important to know what a mortgage payment consists of. Unlike other monthly bills you receive in the mail, your mortgage payment is a bit complex. It includes a lot.
How is a mortgage payment broken down? Because you should always know where your money is going, below is an explanation of how mortgage payments are broken down.
Principal
The money you borrowed in order to purchase your home is the principal. This is the initial loan amount that you were given from the lender. The principal does not include anything else – just the purchase amount.
Your mortgage payments each month only contact a percentage of a payment that goes toward the principal amount of the loan. The larger your principal balance, the greater your mortgage payment will be.
How your mortgage payment is applied to your principal amount will vary depending on the type of mortgage. For instance, with a fixed-rate mortgage, the amount that goes to the principal will remain the same throughout the life of the loan.
Interested in knowing how to save on principal? You must have the right mortgage option for you. And, of course, since your down payment is applied to your purchase price, the bigger the down payment, the lower the loan amount you will need.
Interest
The interest amount on your loan is considered a profit for the lender. In the most basic form, your lender will offer to provide you with the funds needed to purchase a property (the principal) with the understanding that you will pay it back – with interest.
The portion of your mortgage payment that goes toward your interest is all profit for the lender. And it is essential to note that they want this paid back first. This means that for the first several years, you are working to pay off the interest of your loan rather than the loan itself.
The payment will reduce the interest amount you owe before it begins deducting from the principal.
Having a lower interest rate will result in lower payments. But how do you get a lower interest rate? Have a great credit score – or work with the right mortgage lender or broker to help you secure the best loan for your needs.
Taxes
Property taxes are almost always figured into your mortgage payment. This means breaking down your annual property taxes into 12 payments to be paid with your mortgage throughout the year.
The taxes collected each month are placed into a separate account known as an escrow account. This is where they will continue to accumulate until they are due. The lender will then pay your property taxes for you using the funds you have paid each month throughout the year.
Why are lenders so worried about your property taxes?
Believe it or not, they are not doing this out of their own kindness to ensure you don’t have to pay your taxes in one lump sum. Rather, they are looking out for their own interest. If you choose to not pay your property taxes or find yourself in a situation where you cannot pay them in one lump sum, then it is possible to have a lien placed against your property. And tax liens take precedence – impacting your lender’s lien position.
Insurance
Insurance is another amount – like taxes – that is collected each month and tossed into the escrow account for when you need it. That way should an emergency arise, you will have access to the funds to take care of it and protect your home.
Private mortgage insurance (PMI) is another type of insurance that may apply to you if your down payment was less than 20% of the purchase price. This protects you – and the lender – should you be unable to pay your mortgage. A twelfth of your annual PMI is going to be included in your monthly mortgage payment. This, too, will be placed in the escrow account.
Insurance payments do not fluctuate too often so having it included in your mortgage payment should not impact the monthly cost. And, if you would like to avoid having to pay PMI, make a down payment of at least 20%.
FHA mortgage loans don’t require PMI, but they do require an Up-Front Mortgage Insurance Premium and a mortgage insurance premium (MIP) to be paid instead. Depending on the terms and conditions of your home loan, most FHA loans today will require MIP for either 11 years or the lifetime of the mortgage.
The Amortization Schedule
If you want to know how your mortgage payments are broken down specifically, you can take a look at your amortization schedule. This will give you a detailed look at each of your payments, including an explanation of where the percentages are going.
You can even watch how your balance owed drops over the years.
Don’t ever hesitate to discuss your mortgage payments with your mortgage company if you are not understanding how your payment is being applied. Your home is one of the biggest investments you will likely ever make, and you should make a point to understand this monthly expense.
Learn About Mortgage Options at Option Funding
How is a mortgage payment broken down? Securing the right mortgage can help you maintain an acceptable monthly mortgage payment. This means knowing your options.
At Option Funding, Ahmad Azizi and the entire team will work with you, discussing your goals and finding the perfect mortgage to help you meet them.
But we don’t just stop there.
We will help you throughout the application process and in securing the loan. And we are also there for you when you make your first mortgage payment. In fact, Option Funding, Inc. is always here to answer any questions you may have about your mortgage payment so that you have a thorough understanding going forward.
Ready to get started? Your mortgage team is waiting. Contact Ahmad today!