Understanding Your Home Loan Payments

The homeowner’s journey can feel overwhelming, especially if it is your first time purchasing a home. Once you buy your house, you’ll make monthly mortgage payments. You might see terms on your statement you don’t understand. Never fear, we explain them all below so there won’t be any surprises.

What’s Included In a Monthly Mortgage Payment?

Your mortgage payment covers four main charges: principal, interest, taxes and insurance. These components are sometimes referred to in the mortgage industry as PITI payments.

• Mortgage Principal

  This is the amount of your monthly payment that goes toward paying down your debt. If you chose a 30-year mortgage, the principal will be a small amount in the beginning. If you want to track how much principal you’re paying, ask your mortgage originator for an amortization sheet (you’ll probably receive this at closing anyway). The principal increases slightly with every payment.

• Mortgage Interest

  Every payment includes the interest you’re paying on the loan. In the beginning, the interest may make up the majority of your mortgage payment. As you make payments, the amount of interest you pay with each payment decreases.

• Property Taxes

  You’re required to pay property taxes on your new home to your city and/or county. These are included in your monthly payment. Each payment includes 1/12 of your yearly property tax bill.

• Property Insurance

  Your mortgage company will mandate you carry property insurance. If a storm damages your roof, your water heater bursts and ruins your floors, or your home catches on fire, insurance will repair and replace the damage or losses. Your mortgage payment will include 1/12 of your total insurance premium.

Two Other Terms to Understand

• Mortgage Insurance

  If your down payment was less than 20 percent of your mortgage loan, you may be required to pay private mortgage insurance (PMI) in addition to your PITI payments. This is added to your monthly payment. If you paid more than 20 percent down, or used a loan program that doesn’t require PMI, you may not see this on your statement.

• Escrow

  Remember when we mentioned above that you’ll be paying 1/12 of your yearly property taxes and insurance premiums in every payment? These go into an account called “escrow” and accrue until they’re due. The lender pulls the funds out of escrow and pays your property taxes and insurance on your behalf.They do this because they want to protect their investment by ensuring that the property is covered by insurance and that the property tax payments stay up to date. This saves you from the headache of remembering to pay these bills.

Understanding what your monthly mortgage payment includes helps you know where it’s going and how it’s broken down. Over time, your payment may fluctuate a bit as your taxes or insurance premiums increase. You’ll always be notified well in advance, so you can prepare for the change.

Contact us today for answers to all of your mortgage lending questions.