When it comes to making your monthly mortgage payment, what all is involved in the payment? Yes, you make one lump payment. But what’s in that payment, and what does it mean for you? Can it change? Here’s the answers to your questions.
Principal and Interest
The monthly mortgage payment includes the interest accrued during the prior month plus the scheduled principal. The principal is what gets counted towards your payoff (when you sell the house), and interest is the amount the bank makes monthly. Unless you refinance the home, this number doesn’t change. You pay very little in principal, and a lot in interest, at the beginning. This does change every month, and you’ll get an amortization schedule at closing showing you the exact number each month. But the amount in Principal AND Interest doesn’t change; they offset each other. Once you see it, it will make sense. Generally, mortgage interest paid is a federal income tax deduction. (Check with a CPA). A savings at tax time!
These are specific to the subject property. The lender estimates property taxes based on your target purchase location. Once you have a specific home, they can update the numbers to the exact property taxes. Tax rates vary depending on the city, county, and school district. They can also increase every year, which would change your payment. Generally, property taxes are a federal income tax deduction. (Check with a CPA). A savings at tax time!
Also referred to as Hazard Insurance. This insurance protects you, the property owner, against damage to your home. The insurance company selected determines the final cost of the insurance policy. Some factors that affect the costs are age of the home, claims history (on the subject home and on the applicant), age of the roof, property location, and applicant’s credit history. This can also change per year (or policy length), and can affect your payment amount.
Mortgage Insurance (M.I.)
M.I. (or PMI) is an insurance policy to protect the lender in the event that a borrower does not make their loan payments and defaults on the loan. The cost of Mortgage Insurance decreases as your down payment increases. If you put down 20% of the purchase price (or more), you don’t have to pay mortgage insurance. Options include monthly insurance, one time paid at closing, or selecting a slightly higher interest rate in return for no monthly MI, among others. FHA loans require M.I. regardless of down payment in most cases; VA loans do not ever require M.I.
So if you’re in the market to buy a home, Contact Me Today! I can help you get set up with mortgage and insurance people to make sure you’re able to buy a home and have the best coverage.
You can also get a copy of my Home Buyers Handbook when buying to learn about the process!