What Does My Mortgage Payment Cover?

One of the most crucial steps of the home-buying process is to evaluate just how much of a monthly mortgage payment you can afford. 

First-time homebuyers may be surprised to learn that their monthly mortgage payment might not just cover paying back their mortgage loan to their lender. In fact, most mortgage payments include escrow and are typically made up of four separate costs: principal, interest, taxes, and insurance (PITI).

Principal

The principal is the initial sum of money you’ve borrowed from your lender to cover the cost of your home purchase. This is probably what most people think of when they think of their mortgage payments. Every month, your principal payment will go toward paying off the balance that you owe.

For example, if you purchase a $300,000 home with a 20% down payment ($60,000), your remaining principal balance will be $240,000, which you will pay off step-by-step in monthly increments.

Interest

When you borrow money to purchase your home, you agree to pay back your principal balance plus interest. 

The interest is a percentage of your principal payment and goes toward your lender as a fee for allowing you to borrow money. 

Your interest payment is based on a rate that you secure with your lender prior to closing on your home. Interest rates are constantly changing, so it’s recommended to choose a mortgage with a fixed interest rate so you’re always sure of how much you’ll pay each month.

Taxes

Property taxes fund firefighters, police, schools, roads, and other public services, and all homebuyers must pay them. 

Property taxes are calculated based on the assessed value—not the market value—of your home. Though local governments charge property taxes yearly, you will likely pay a portion of your property taxes each month as part of your monthly mortgage payment. Your lender usually will save up your monthly property tax payments into a separate account called an escrow to be paid at the end of the year.

Insurance

Natural disasters and accidents can happen at random and can cause costly damage to your property. That’s why all homeowners are strongly encouraged to get homeowner’s insurance.

With homeowner’s insurance, your insurance company will handle the costs of repairing and rebuilding if a hurricane, tornado, fire, robbery, or another unfortunate event negatively impacts your home. 

Depending on your situation, you may pay a premium for your homeowner’s insurance on top of your principal and interest payments. Similar to the process for paying your property taxes, your lender will collect those payments in an account and draw the money out when your insurance payment is due at the end of the year.

 

With a solid understanding of the fees covered by your monthly payments, you will be better equipped to know just how much of a mortgage you can fit into your budget. There are many mortgage options out there, so it’s wise to talk with a professional to find the best fit for you. If you are looking to explore your options, contact the professionals at Custom Coastal Mortgage today.