Buying a home is one of the most expensive purchases you’ll make in your lifetime. And paying off that mortgage is a commitment you need to be financially prepared for.
Mortgages are complicated, and most people don’t fully understand how it’s calculated and what it’s made up of. Monthly payments are made up of four key components: principal, interest, taxes, and insurance. In this article, we’ll take a deeper dive into the makeup of a monthly mortgage payment, so you can understand how much you’re paying and why.
What’s included in a monthly mortgage payment?
- Principal. This is the amount of money you borrow from your lender to purchase a house. This is calculated by subtracting your down payment from your home’s final selling price. Principal is the most important factor when deciding how much you can afford, because it starts collecting interest as soon as it’s taken out. In addition, you’re also responsible for any repairs, maintenance, taxes, insurance, etc.
- Interest. Interest is the money you pay to the mortgage lender in exchange for giving you the loan. Interest is typically calculated by looking at an annual percentage rate (APR). This is the amount of interest you’ll have to pay on your loan per year. Interest is tricky, because even a few percentage points can dramatically shift how much you eventually end up paying for the loan. The percentage of interest paid on a loan is determined by factors like credit score, location of your home, price of down payment, etc. It’s important to note that all lenders are different, so make sure you do your research.
- Taxes. As always, taxes are inevitable. And no matter where you live, you need to pay them. Property taxes help fund public places like schools, fire departments, construction, etc. This is often something that homeowners overlook, but can end up being the most expensive. These taxes are determined by looking at the value of your home and what the amenities in your local community look like. The amount can change each year, and oftentimes the county will require you to get a new appraisal every couple of years. Based on tax authority requirements, tax assessors can adjust the rate by evaluating the value of your property.
- Insurance. While having homeowners insurance isn’t required to own a home, it’s certainly encouraged. In fact, many mortgage lenders won’t give out a loan unless you have it. Homeowner’s insurance is important because it protects you in the chance that an unfortunate event happens, such as flooding or a fire. If you have specific items in your home you want to protect, you should think about buying a rider policy. It’s essentially an extra statement in your homeowner’s policy that makes sure your coverage is extended to protect those items. Homeowner’s insurance is decided based on a few factors, including your home’s location, value, what kind of area you live in (urban, rural, etc), and how close you are to safety stations like fire departments and police stations. All of this can vary by state as well.
Need additional help understanding your monthly mortgage payment? Ken Venick would love to help! With over 30 years in the business, he can point you in the right direction for you or your client’s needs. Visit our home page to learn about the various mortgage services we can provide, and don’t hesitate to contact us today.