When you buy a home, you’re going to have to start paying your mortgage payments. However, many homebuyers don’t know what costs are included in their monthly mortgage payment. Some may think it’s just the cost of the loan, but there is more to it than that.
The four components that make up your mortgage payments are often referred to as PITI (Principal, Interest, Taxes, and Insurance) and is an important aspect of the breakdown of your monthly mortgage payment.
The principal is the amount you borrow from the lender. This part goes towards paying down your loan amount, which is the sale price of the home minus your down payment. For example, if you are buying a $200,000 home and you put down 20%, your principal is $160,000.
Almost all home loans are structured so that the amount of principal you pay each month starts small, but increases over time. It’s more likely that the interest portion will be much a much larger payment than your principal amount at the start.
Your lender gets paid for giving you the loan, and how they get paid is through interest. It’s calculated based on the interest rate offered to you by your lender. Your payments on interest are going to be higher than your principal at first. This is because the interest is calculated based on the size of the principal.
When you are almost done paying off the principal, the interest on that sum is a lot less. That interest is spread out over the number of months you’re paying back your loan.
Another component of your mortgage payments are government property taxes. Taxes are 1/12 of the annual property taxes on your home. These taxes are used to pay for schools, fire departments and police stations.
Some homeowners pay their property taxes directly, but lenders usually estimate the amount and calculate that into your monthly mortgage payment, and then the loan servicer handles it all. This way, you can be sure it gets paid on time.
So, how does this work? The portion of your taxes that you pay each month is held in escrow until the tax bill comes due, and then the servicer pays it for you. Sometimes at the end of the year you may get back some or owe a little extra, since it is just an estimate.
The last piece of your monthly payment is insurance. Insurance protects both you and the lender. This may include both homeowners’ insurance and PMI, or a mortgage insurance premium if you have an FHA loan.
However, PMI can be canceled when the buyer reaches 20% equity in the home. Both PMI and homeowners insurance premiums can be paid as once yearly lump sums, but are most commonly divided into the monthly payments.
It’s important to note that you select your insurance company and policy, so your lender has no control over the premiums. Your lender will receive copies of your insurance bills and will pay them for you, but does not negotiate lower rates or premiums for you.
What’s Not Included In Your Monthly Mortgage Payment?
Utilities, homeowner’s association fees, and condo association fees are not included in the mortgage payment that you pay to the lender.