While there are many ways you can prepare for your mortgage payment, one way to get ready is to learn what makes up your monthly mortgage payment. Once you understand what expenses you’re covering each month, you’ll get a better sense of how to adjust and plan your budget.
What Is the Purpose of Your Mortgage Payment?
Your monthly mortgage payment includes four elements: principle, interest, taxes, and insurance (sometimes called “PITI”). After you’ve been accepted for a loan, your loan officer will work with you to determine the amount and terms of your loan. They’ll then calculate your house payment by taking these four factors into account:
- The principal is the money you borrow to acquire a property. With each mortgage payment, a portion of the principal is usually paid off, decreasing your outstanding debt and boosting your home equity.
- The interest rate is the fee that a lender charges you to borrow money to acquire a home. Mortgage rates are determined by numerous variables, but generally, risk affects them. Credit score, down payment, loan program, loan type, property type, and loan to value all influence interest rates.
- Annual property taxes are levied by local governments to support public services, such as community schools, roads, police, and other departments. They are generally a percentage of the assessed value of the property. Make sure you know what you’ll be paying for local property and county taxes before purchasing a home.
- Insurance is a form of coverage that protects you against financial loss from fire, natural catastrophes, and other causes. If you’re taking out a mortgage to finance your house, this insurance will be needed. Keep in mind that if your down payment is less than 20% of the purchase price, you’ll almost certainly need private mortgage insurance (PMI) from your lender if you stop paying on the loan.
Remember, many loan quotes just include your principal and interest. To determine your total monthly mortgage payment, you’ll also need to include the taxes and insurance.
Your Escrow Account
If you’re buying a home for the first time, it might be intimidating to consider making a monthly mortgage payment as well as dealing with new expenditures like property taxes and homeowner’s insurance.
Setting up an escrow account with your lender is another approach to maintain yourself organized and to guarantee you have the cash required to pay these bills. If you put less than 20% down and are a first-time buyer, you may not be able to opt-out – your lender may insist on establishing an escrow account.
With a mortgage escrow account, you make monthly payments to your lender based on 1/12 of your annual real estate tax bill, homeowner’s insurance premiums, and PMI (if required) payments. The money is kept in an escrow account and paid out to your county assessor and insurance firms as the payments are due when you have a mortgage escrow account.
Once you’ve acquired a home, you’ll notice that paying your mortgage is more time-consuming than writing a monthly rental check. Keep in mind, though, that each payment you make contributes to the growth of equity in your home and helps you get closer to your goals.