Every month you pay your monthly mortgage payment to your lender, and sometimes the payment amount changes. Do you know what all makes up your monthly payment, and why the amount can change? Your mortgage payments can consist of Principal and Interest, Real Estate Taxes, Property Insurance, and Mortgage Insurance (also known as MI or PMI).
Principal and Interest
Once you have closed on your new home, your mortgage lender will provide you an amortization schedule for your monthly principal and interest payments. The principal payment gets counted towards your loan amount, and the interest is the amount the lender receives for the loan. The total monthly amount due will not change through the term of the loan (unless you refinance your home), but the monthly amount for principal and interest will. At the beginning of the loan term, most of your monthly payment will go towards the interest and a small amount will go to the principal balance. As you get further along in your loan payments, the amount that goes to the interest will get smaller while the amount going towards the principal balance will get higher.
Real Estate Property Taxes
The property taxes are the third item that makes up the monthly mortgage payment, which will go into an escrow account. The lender will work directly with the county tax collector to obtain all information for your property taxes. The county will not only send you the property tax bill, but they will also send it to the lender which the lender will pay out of the escrow account on your behalf. The monthly amount that you pay to the escrow account can change due to an increase or decrease in the property taxes assessed each year.
Homeowner’s insurance is the fourth item of the monthly payment. Just like the property tax payment, this monthly payment to the lender will go into an escrow account. It too is paid annually by the lender, on your behalf, to your insurance company. This monthly amount paid to the escrow account can change as well as the property insurance rates can change yearly with your insurance company.
Mortgage Insurance (MI or PMI)
If your down payment is less than 20%, you will be required to pay for mortgage insurance. This is an insurance policy that protects the lender in the event a borrower defaults on their mortgage. The higher your down payment, the lower the cost for mortgage insurance. VA loans do not require mortgage insurance. Once your mortgage insurance cost is determined by your lender, you can pay a monthly payment (which would be included in your monthly mortgage amount), make a one-time payment at closing, or take a higher interest rate in exchange for no mortgage insurance. Your lender will provide you with these estimates so you can determine what would be best for your financially.
Contact me TODAY if you’re in the market, or even considering purchasing a home! I can assist with helping you in not only locating the perfect home, but put you in contact with mortgage lenders. Don’t forget to download a copy of Spinway Homes’ Guide to Buying a Home.