Many people have a mortgage, but not everyone understands what’s in that payment you send each month. We’re going to break down each part of a mortgage payment so that you will understand all the different components and see how those components can possibly help you get a better rate.
Parts of a Mortgage Payment
Think of your mortgage as a pie—each piece of the pie is a different component of your mortgage. We’ll break down each piece of mortgage:
SLICE 1: PRINCIPAL
The principal is the original chunk of money you put down for the house. If you put down a 20% down payment for a $200,000 house, the principal will be the remainder of the price ($160,000). The principal portion of the mortgage goes to paying this amount down.
SLICE 2: INTEREST
The interest part is how the mortgage lender makes money. Think of it as the payment for borrowing the lender’s money. They will charge you an annual percentage rate (APR) which is based on a number of factors, including credit score, down payment, and location of your home.
SLICE 3: TAXES
We all know Benjamin Franklin’s saying about death and taxes—and that’s true for your mortgage payment, as well. And this is probably one of the most important parts of your payments. If you don’t pay taxes (namely property taxes in a mortgage payment), the town in which you live can start the foreclosure process. Be mindful that the amount of taxes you pay can change from year to year.
SLICE 4: HOMEOWNER’S INSURANCE
Another important slice of the pie that will help cover you in case of an emergency. This amount may also vary, especially if you live in an area with nature hazards (like floods, fires, or tornadoes). Your insurance and taxes can be “escrowed” and sent into an escrow account that lenders set up for you to pay these expenses. Bear in mind that not all lenders do this, though!
SLICE 5: PRIVATE MORTGAGE INSURANCE
This is something you typically pay if you put less than 20% down for a down payment. This is to protect your lender in case you default on your loan. This also might be considered part of your escrow account.
SLICE 6: HOMEOWNER’S ASSOCIATION FEES
Some private residential communities charge a homeowner’s association (HOA) fee for maintaining the property or special shared amenities for the community. These are pretty common in condos, townhouses or gated neighborhoods and can be added right to your mortgage payment.
We can help!
Purchasing a home is a big deal. And we know it can be overwhelming. So we’ve created a comprehensive guide to walk you through the process.
