Mortgage Payment Breakdown: Where Does Your Payment Actually Go?
Chances are you know exactly how much you make your check out for every month when you pay your mortgage, but do you know what you are actually paying for? As a company, we talk a lot about interest rates and closing costs when investigating a refinance or purchase, however, once all the paperwork is signed it’s easy to lose track of the exact terms of our mortgage. Let’s take a deep dive into exactly what your mortgage payment is allocated toward. Read on for a full mortgage payment breakdown.
The Four Parts of a Mortgage Payment
Your mortgage payment is broken down into four parts; principal, interest, taxes and insurance.
Principal: This is the portion of your payment that goes to the repayment of your loan. If you examine your amortization schedule, the breakdown of your mortgage payments through the life of your loan, you will see that the portion of your payment put towards principal is smaller in the beginning of your term and grows over the life of the loan. Make sure you take this into consideration when checking your loan balance in the early stages of your loan term. As you continue on, larger chunks of your payment will go toward principal and you will see that in your balance.
Interest: The portion of your payment that goes toward interest is paid to the lender who services your loan. Looking at your amortization schedule you will see this amount become a smaller percentage of your payment as you continue through the life of your loan.
Taxes: The tax portion of your payment could be considered to be the most important piece of your monthly payment. The taxes here are your property taxes on the property that you hold the mortgage on. Some lenders require taxes to be escrowed with your mortgage payment since missing these payments could make your property eligible for foreclosure and no one wants to see that happen. By escrowing your taxes your lender is prepaying your tax bill and then collecting the money back from you with your mortgage payments. Due to changes in your property taxes year to year you could see a change in your total mortgage payment. If you see a change in your payment and you are unsure why, your property taxes are a great place to check.
Insurance: Like taxes, insurance can be escrowed into your mortgage payment to make sure that you are covered in the event of an issue with your property. Insurance amounts can also vary year to year based on any claims that you have or changes in coverage. Be sure to work with your insurance agent to have the best rates and coverage available for your property.
Additional Mortgage Payment Pieces
Depending on your particular situation and the loan program you used when buying or refinancing your home, you may have a few additional pieces to your mortgage payment.
PMI: Private Mortgage Insurance (PMI) is added to your mortgage payment if you are borrowing more than 80% of the home’s value at time of purchase. This insurance covers your mortgage lender in the case that you default on your loan. With certain loan programs the PMI will go away when you reach 20% equity, however, that is not the case with all programs. It is important that you work with a qualified Mortgage Consultant who can make sure you are using the right program for your financial needs. If you are currently paying PMI and think you may qualify to eliminate it with a refinance, now is the time to check! Our Mortgage Consultants are always happy to help you run some numbers and see if you can save some money on your monthly mortgage payments.
HOA and Other Fees: Depending on the type and location of your property, you may have additional fees to pay every month such as an HOA (Home Owners Association) fee or Condo Association Fee. These types of fees typically cover amenities and services for your property and can vary greatly. Make sure you take these fees into consideration when looking at your monthly mortgage budget.
Things to Explore
If you have not already, take a look at your amortization schedule on your current loan. Look at where your monthly payment is going and how a refinance may benefit you. Right now, rates are low and property values continue to rise. If you have any thoughts of selling your home and upgrading to a larger home, you will get more house for your dollar at these rates. If you are happy where you are, you may still be able to save some money with a refinance. Knowing the ins and outs of your mortgage payment can help you make better decisions about your homeownership future, and Cambria Mortgage is always ready to assist.