What Is Included In A Monthly Mortgage Payment?
A seemingly simple calculation for your potential home loan amount should be the principal and accrued interest divided by the loan term length. However, mortgages and real estate are much more complicated. There are actually three other items lumped into your monthly mortgage amount that cover associated costs.
Homeowner’s Insurance
Because the bank technically owns the home until you pay off the mortgage balance, the lender wants assurance that the structure remains intact and livable until it is not their asset. Homeowner’s insurance covers structural damage from fires, vandalism and other issues. You must pay a monthly premium as part of your mortgage amount to keep the insurance active.
Property Taxes
Real estate taxes must be paid quarterly, biannually or yearly, depending on the region. These taxes are often several thousand dollars, making their bill relatively large. To ensure that you pay the taxes on time, part of your mortgage payment goes toward savings, or an escrow account. The funds are held in escrow until the taxes are due. The lender then pays the taxes for you out of the escrow account. Most insurance payments use the same strategy to keep you up to date on bills.
Mortgage Insurance
Most properties requires a 20 percent down payment as a good faith deposit on the home’s value. If you cannot pay the 20 percent, but your credit is good, the bank may still fund the loan with the stipulation of private mortgage interest, or PMI, payments. This insurance protects the lender from losing its investment in your home if you default on the loan. PMI is actually good for both the lender and borrower. Besides protecting the lender, the borrower eventually pays the home’s balance down. When the owner has 20 percent equity in the property, the PMI can be cancelled and removed from the monthly mortgage payment.
Refinancing Issues
If you refinance your home at some point, go over all the extra funds required in the monthly payment. Lenders often quote the principal and interest to keep you interested in the new loan, but fail to tell you the escrow amount. Ask the lender about all associated fees and the grand total monthly amount. When you add in all the refinancing fees, or closing costs, the new loan may not be such a good deal.
Mortgage payments encompass many different parts, but it is streamlined so you have one payment rather than four separate checks to write. Between insurance, taxes, principal and interest, your monthly mortgage ensures that all of your real estate commitments are covered.
