Understanding Your Mortgage Payment

How it's broken down


Do you know what you are paying monthly? If you don't, you're not alone. Most homeowners don't know what they will be paying even before purchasing a house. In fact, a large percentage of homeowners don’t know their exact interest rate or what they currently owe on their loan balance. If you never knew, or need a refresher course, here are the components of your mortgage payment:

You're Mortgage Payment is typically divided into 4 or sometimes 5 elements. Depending on the type of loan you agree to. It's always important to speak with your mortgage professional about your loan terms so that you understand them clearly. So, to jump right in, your typical mortgage payment is divided up as follows:

Principal

The principal is the repayment of your loan amount. This is the portion of the payment that is used to reduce the balance you owe. It may be obvious, but the larger the balance, the higher the mortgage payment. There is a lot of information on your repayment from your amortization schedule. This is a breakdown of every payment for whatever term you select. A greater amount of principal is paid during the back half of your loan. The first seven years of a thirty year loan will go mostly towards the interest.

Interest

Interest is the lender’s reward for taking a risk and loaning you money. The interest rate on a mortgage has a direct impact on the size of a mortgage payment: Higher interest rates mean higher mortgage payments. Higher interest rates generally reduce the amount of money you can borrow, and lower interest rates increase it.

Taxes

Taxes are the most important part of your mortgage payment. This is often the area that is most overlooked, but it is the most important. Almost all lenders require you to include, or escrow, the taxes into your monthly payment. The reason they do this is because property taxes take lien priority over everything else. If your taxes weren’t escrowed and you defaulted on your tax payment, the town could begin the foreclosure process. The tax portion of your payment could change from year to year depending on the town.

Insurance

Like your property taxes, the insurance is typically escrowed into your monthly payment. Lenders do this to ensure that you are always covered in the event of an emergency. From time to time, your insurance company may check out the condition of the roof or rates may increase. The taxes and insurance typically do not experience much fluctuation, but if there is a run on foreclosures or if the town was impacted by weather issues, it could change significantly in a matter of months.

Private Mortgage Insurance (PMI)

If you are like most homebuyers, you bought your house putting less than 20 percent down. Under this scenario, you make a payment that is included in your monthly mortgage towards monthly PMI. This money is considered protection against mortgage default by your lender. 

Know Your Mortgage Payment

Based on the home's sale price, the term of the loan, buyer's down payment percentage, and the loan's interest rate, this calculator can help estimate what you'll need to pay out monthly for your new home. This calculator factors in PMI (Private Mortgage Insurance) for loans with less than a 20% down payment, as well as town property taxes and its effect on the total monthly mortgage payment.

Buying a home is a big step! Whether you're buying your first home, your dream home, or your tenth investment property, yours will be a big investment. We know how important this is to you and we have an army of experts to make sure we find the perfect property for your unique circumstances. Finding the perfect property is just one way we can help you with your real estate purchase.

In order to determine the amount of home you can afford a lender will use your debt-to-income ratio to determine the percentage of your pre-tax income you spend on debt. Your debt ratio will include: monthly housing costs, car payments, credit cards, student loans, and any other installment debt. If you take on more debt before buying a home it will have an impact on the amount of the loan that the lender will finance.

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