What a Mortgage Payment Includes

Ever looked at your mortgage statement and wondered, Where is all this money going? You’re not alone! A mortgage payment isn’t just about paying back the money you borrowed but also includes things like property taxes and insurance that keep your home (and your lender) protected.

Here’s what goes into your monthly payment and how each part works behind the scenes…

Principal

Each month, a bit of your mortgage payment chips away at your principal—the total amount you borrowed on your home. Most of your payment goes toward interest early on, but hang in there! More of it will begin paying down that loan balance for good over time as part of a slow and steady progress called “amortization.”

Example:
If you purchase a $350,000 home with a $50,000 down payment, your loan amount (or principal) is $300,000. Each payment means you’ll owe a teeny-tiny bit less on that balance the next time.

Interest

Interest is essentially the cost of borrowing money from your lender, with your mortgage interest rate determining how much you’ll pay over time.

• Fixed-rate mortgages have the same interest rate for the life of the loan, keeping your monthly payment predictable.

• Adjustable-rate mortgage (ARM) interest rates can change after a set period, potentially causing your payment to fluctuate.

Thanks to amortization—the process of gradually paying off your home loan (both principal and interest) via regular scheduled payments—early payments mostly cover interest, while later ones pay down the principal much more quickly.

Property taxes

Homeowners pay property taxes based on their home’s value and local tax rate. Many lenders collect a portion of this bill each month and place it into an escrow account to then pay on your behalf when taxes come due: keeping your taxes current and avoiding a large lump-sum bill.

Homeowners insurance

Most lenders require homeowners insurance to protect your home (and their investment) from events such as fire, theft, or storm damage. As with property taxes, the cost is often bundled right into mortgage payments and held in an escrow account. A small portion is then set aside each month until your annual premium comes due so there’s no need to worry about a big bill showing up out of nowhere.

Mortgage insurance (sometimes)

Homeowners who put less than 20% down often need to pay mortgage insurance, typically either private mortgage insurance (PMI) for conventional loans or FHA mortgage insurance premiums for loans backed by the Federal Housing Administration. This type of insurance protects the lender if you default on the loan with the cost added to your monthly payment, and those with conventional loans can typically cancel PMI upon having 20% equity in the home.

Other possible monthly costs to consider

• Homeowners’ association (HOA) fees: Those who own in a condo complex or planned community might need to pay monthly or quarterly HOA fees.

• Flood or supplemental insurance: Those located in a flood, hurricane, or earthquake zone may need extra protection (and yes, to pay another bill) as standard homeowners insurance doesn’t cover everything.

• Mortgage servicing or escrow fees: Some lenders tack on small administrative fees to manage a loan or escrow account.

• Maintenance and repairs: Leaky faucet? Cracked driveway? Homeownership comes with surprise expenses ignored by even the best mortgage calculators. It’s therefore smart to budget a little cushion for those inevitable “didn’t-see-that-coming” moments.

Putting it all together

When you break it down, your monthly mortgage payment (often called PITI) covers four main things:

• Principal

• Interest

• Taxes

• Insurance

Understanding your mortgage payment makes budgeting simpler and keeps surprises off your doorstep. When shopping for loans, don’t just focus on the rate, ask for a Loan Estimate (a three-page form that you receive from your lender after applying for a mortgage to see how taxes and insurance factor in. Knowing where your money goes helps you stay on track toward owning your home outright.

Have questions about the home-buying process? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. Schedule a no-obligation consultation with one of our financial advisors today!

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.