What is included in my mortgage payment?
Looking at buying your first home comes with a lot of new financial information. As you consider the variables of one of the largest purchases most people will make in their lifetime, it's a good idea to ask “What is included in my mortgage payment?”
As homeowner or potential home buyer, it is important to know what is included in your mortgage payment. Knowing the structure of your mortgage helps you understand where your dollars are applied each month. A conventional mortgage payment generally has four components referred to as PITI; principal, interest, taxes, and insurance. Depending on the type of mortgage you have, you may also have mortgage insurance or HOA dues as a part of your monthly payment.
Let’s take a closer look at what is included in monthly mortgage payment:
Principal and Interest Payment
The principal is the amount of your payment each month that is applied to paying back the balance of your loan. As you pay back the balance, you are building equity. Equity is the portion of the home’s value that you hold.
Each month your mortgage payment will include a portion toward the principal loan balance. If your goal is to pay off your mortgage more quickly, you can pay extra toward your principal each month. Paying extra toward your principal can reduce the total amount of interest you pay over time. Mortgages in the U.S. do not include pre-payment penalties. This means that there is no penalty fee for paying more toward your principal balance or paying off your mortgage sooner than the 30, 25, 20, or 15 year term.
Interest is the ongoing cost of borrowing money. The interest rate on your loan can be fixed or variable. Whether your interest rate is fixed or variable it will impact your monthly mortgage payment.
In today’s low-rate market, most homeowners choose to have a fixed rate mortgage. A fixed rate mortgage locks in the interest rate and protects you from fluctuations on the market. Throughout the life of the loan the principal and interest portion of your mortgage payment will not change with a fixed rate mortgage.
An ARM, or adjustable rate mortgage has payments that can change as the interest rate changes over time. The adjusting interest rate will influence the amount of interest you will pay each month and over the full term of the loan. ARM mortgage options are not a popular choice for home owners today.
Talk with one of our licensed mortgage consultants about getting a “Custom Interest Rate Quote” for your potential mortgage options.
State/county property taxes are held in your escrow account. A portion of your monthly mortgage payment is applied to saving for once a year, when the annual taxes are due. As property values rise, your taxes can rise and increase your monthly mortgage payment.
When you are searching for the right home for you and your family, remember that some areas have higher local property taxes than other areas. State property taxes are allocated to local schools and government services. Homes located in more populated areas are likely to have a higher tax rate. This is due to the need to support bigger schools, more roadway maintenance, public parks, as well as local fire, police, and emergency medical services.
The bank servicing your mortgage loan will coordinate the annual tax payment with your county tax office during the repayment period of your loan with an escrow account. Having an escrow account is optional for some loan programs, but have a number of benefits. Learn more about how an escrow account works within the structure of your mortgage here.
Homeowners insurance is another cost that is built into the escrow portion of your monthly mortgage payment. Carrying a homeowners insurance policy is required for the entire term of your mortgage. The average annual cost of homeowners insurance ranges from $1,200 to $1,800. This makes the average cost included in your mortgage payment that goes toward homeowners insurance about $100 to $150 each month.
Protecting your investment in the event of major damage to your home, homeowners insurance is a service that you can shop for during the loan process. Consider the costs of living in areas that require additional flood or increased hazard insurance coverage.
Homes in some pre-planned communities or condominiums can potentially require monthly dues to a homeowners association. This cost can be built into the structure of your escrow account collection.
Not all HOA dues are payed as a part of your mortgage. It’s important to thoroughly review the details of the HOA contract before you purchase the home.
PMI or MIP
Private mortgage insurance or mortgage insurance premiums are required on certain mortgages. Mortgage insurance protects the bank servicing your mortgage in the event that you default on the loan. Mortgages that are considered at higher risk of default require mortgage insurance as a part of your monthly mortgage payment during some or all of your loan repayment term.
A conventional mortgage with less than 20% equity will require private mortgage insurance as a part of your mortgage payment. One of the benefits of a conventional loan is that you are able to drop the mortgage insurance, once you hold 20% equity or more in the home.
USDA and many FHA mortgages require a monthly mortgage insurance premium for the life of the loan. This is one top reasons that homeowners refinance theses types of government backed mortgages to a conventional loan once they hold 20% equity. Refinancing to drop the mortgage insurance on your mortgage payment can potentially save you thousands of dollars each year.
Mortgage Payment Calculators
Take a look are the numbers to get a good estimate of what your potential mortgage payment could look like with our easy online calculators.
- Home Purchase: Mortgage Payment Calculator
- Refinance: Mortgage Payment Calculator
- Cash Out: Mortgage Payment Calculator
Talk with one of our licensed mortgage consultants about your best mortgage options. We are here to help you understand the details of your loan and guide you through the mortgage process.