Most homeowners, with a mortgage loan, usually make just one-time monthly payment. Most often, a mortgage payment is combination of five major components.
Got a mortgage loan but are unaware of what goes into its payment? Look no further! Below in this detailed blog post, we’re going to break down five major components of a mortgage payment. So, let’s enumerate each one by one.
Principal
The principal represents the initial amount of money borrowed in order to secure the purchase of a property. When you make each mortgage payment, a percentage of that payment goes toward reducing the overall principal balance.
This is what gradually increases your equity—the ownership stake you have in your home—over time. In other words, building equity is a vital aspect of homeownership, as it can offer financial leverage for future borrowing or serve as a nest egg for retirement.
Interest Rate
The cost of borrowing money is known as the interest rate. It’s usually expressed as a percentage of the overall loan amount. This critical factor helps determine the total amount you will pay for your home over the life of your loan.
Interest rates are of two major types.
- Fixed: It offers stability by remaining unchanged throughout the mortgage term.
- Variable: The amount fluctuates based on prevailing market conditions.
The choice of interest rate significantly influences the total financial burden of the loan. This makes it essential to understand how it impacts your monthly payments and the overall cost of financing your real estate.
Homeowner’s Insurance
This type of insurance can protect your investment against a myriad of risks, which include, but are not limited to:
- fire,
- theft, and
- the impacts of natural disasters.
Most reputable lenders, including AmeriSave, typically require homeowners to carry adequate insurance coverage to ensure the safety of their real estate investments. Additionally, the premium coverage often supports the monthly mortgage payment.
Before you secure this coverage, it’s wise to calculate mortgage payments. As a result, both your home and your financial future are shielded from unforeseen circumstances that could jeopardize your overall homeownership experience.
Property Taxes
As a homeowner, you’re obliged to pay property taxes. Such taxes are mandated by local government authorities, and depending on the appraised value of your home. Property taxes can also significantly contribute to community services, such as:
- schools,
- roads, and
- public safety.
In your monthly payments, these taxes are included and kept in an escrow account until they are due. This will provide a structured approach to ensure better compliance with your tax responsibilities. What’s more, you will avoid potential penalties or liens against your property.
Mortgage Insurance
If the down payment is less than 20% of the home’s purchase price, many lenders require mortgage insurance, which protects the lender in case of default.
This can be either Private Mortgage Insurance (PMI) for conventional loans or mortgage insurance from the Federal Housing Administration (FHA) for government-backed loans. Like homeowner’s insurance, this cost is often included in the monthly payment.
