What Does a Mortgage Payment Include?
As with most loans, a portion of the repayment goes towards the principal of the loan, which is the money that you have borrowed, and another portion goes to the interest, which is the cost of borrowing that money. A mortgage payment often includes a couple of more segments, which are taxes and insurance. Taken together, these four segments comprise the “PITI” payment (principal, interest, tax, insurance). Let’s explore in depth the different parts of a mortgage payment.
The principal is the actual money that you have borrowed from the lender. If your mortgage loan was $100,000, then the principal that you pay back over the length of the loan is $100,000. Generally, loans are structured so that the amount of principal returned to the lender starts out smaller and increases with each payment.
Interest can be thought of as the lender’s pay; interest is essentially the lender’s reward for taking a risk and loaning you money. The interest rate will affect how much of your monthly mortgage payment is going towards interest versus principal. The higher the interest rate, the higher the mortgage payment as a whole, and the more money that goes directly towards interest.
Mortgage loans are different than many other loans because they incorporate the cost of real estate/property taxes. These taxes are calculated by the government on an annual basis, but borrowers usually pay these taxes as part of their monthly mortgage payment.
There are three common types of insurances that may be involved with a mortgage: property insurance, private mortgage insurance and flood insurance. Property insurance is standard with every home and protects the home and its contents from disasters such as fire and theft. Mortgage insurance, MI, is for homeowners who have purchased a home with a down payment of less than 20% of the home’s cost. There are two common types of mortgage insurance, FHA insurance and private mortgage insurance. This insurance protects the lender in the event that the borrower is unable to repay the loan. PMI can be dropped once the homeowner has at least 20% equity in the home, which in turn lowers the insurance part of the mortgage payment. The FHA insurance premium continues for the lift of the loan. Flood insurance is only applicable to those properties identified in a flood zone and helps protect the lender and borrower from loss due to flooding. If a property is in a flood zone, flood insurance will be required for the life of the loan.
If you would like to know more specifics about your individual mortgage loan payment, or have questions about any of these parts of a mortgage payment, feel free to contact a Howard Hanna Mortgage Loan Originator today! They are experts in the field of mortgage services and are happy to assist you with any and all questions you may have.