Every month, it comes in the mail. Your mortgage statement.
If you own a house, much more likely than not, a monthly mortgage payment is just a fact of life.
While we know we have to pay it, it might be less clear exactly what we’re paying for. We know it’s a payment that goes to pay off the loan on our house. But what other things are included in that mortgage payment.
It can vary a bit, however, there are usually 4 main types of costs that you pay for in your mortgage payment. Let’s look at them below.
What Is Included In A Mortgage Payment?
The four main components of a mortgage loan payment are the following:
Also known as PITI, these 4 categories make up a mortgage payment. In certain situations, there is more than that.
The basic mortgage payment comprises two parts: principle and interest. The principal is the loan amount borrowed from a lender to purchase your home.
The principal is the amount of money borrowed to purchase your home or the portion of the loan that has yet to be repaid. A part of each mortgage payment is set aside for principal repayment.
Remember that the more money you put down as a down payment, the less you will have to borrow.
The amount of money you can borrow is determined by several factors, including your monthly income and existing debts such as auto and student loans.
Interest is the cost of borrowing money from a lender. It is commonly expressed as a percentage of the amount borrowed. Interest is the lender’s incentive for taking a risk and lending you money.
The mortgage interest rate directly impacts the size of the mortgage payment. Higher interest rates equal higher mortgage payments.
Your lender determines interest rates depending on various factors, some of which you have control over and others which you do not. One of the most crucial aspects over which you have influence is your credit score. A higher credit score may enable you to obtain a lower interest rate.
You will have to pay a property tax on your home regardless of your location. The amount you pay is dependent on a percentage of the value of your home, which can vary from year to year.
The actual amount you pay is determined by several factors, including your home’s assessed value and local tax rates. Each county typically has a unique taxing structure. However, most of the time, your mortgage payment will usually include one-twelfth of the estimated annual taxes on your home. This will go into your escrow account (more on escrow in a minute).
There are two types of insurance that can be included in your mortgage payments, and those are:
- Homeowners insurance: Homeowners insurance acts as a safety net to protect you, your lender, and your home and money in the event of a natural disaster or an accident on your property, like a fire or flood.
- Mortgage insurance / PMI: Mortgage insurance does not apply to everyone, but if you cannot make a substantial down payment on your home, you will most likely be required to pay a fee. If your down payment is less than 20%, you will be required to purchase private mortgage insurance, which is an additional insurance policy that protects the lender if you are unable to make your mortgage payments.
An escrow account is a reserve put up by many lenders under the terms of your mortgage to pay for a portion of your annual payments for property taxes and insurance premiums, such as homeowners insurance. Each year, your mortgage company will use the funds in your escrow account to pay your taxes and insurance when they are due.