What’s in My Mortgage Payment?
Understanding What Makes up a Mortgage Payment
A mortgage calculator may only be able to give you part of the payment, but it is important to factor in all monthly fees to protect your true budget.
What your mortgage payment consists of depends on your loan program, down payment, principal loan amount, and interest. Your payment will likely contain an escrow account for your property taxes, hazard / fire insurance, and some form of mortgage insurance. An additional monthly payment is your Home Owner’s Association, PUD, or Condo Association fee that may not be included in your monthly mortgage payment.
“PITI” consists of the following:
This is the portion that goes toward paying down your balance. Mortgage loans are amortized in a way where this amount is small initially, but grows over time. The first few years of your loan are mostly being applied toward interest.
The interest payment is essentially the amount you’re paying the bank over time to borrow the principal balance. Depending on which loan program, interest rate, and closing cost scenario you chose, the amount of interest due every month is based on the amortization schedule and term/length (30,20,15 years).
Real estate taxes can either be included (impounded) in your monthly payment (PITI), or paid by the homeowner separately.
Certain government loan programs or high loan-to-value (LTV) mortgages require that taxes and insurance be included with the total mortgage payment.
Either way, it’s important to make sure you ask your loan officer and/or closing agent during the final loan docs signing to clearly explain what’s included in your monthly mortgage payment.
This is your hazard insurance (fire), which protects your home and belongings.
While there are many ways to save money on your property insurance, it’s important to know and trust your insurance agent so that you can be fully aware of what’s covered in your policy. Flood insurance may be something separate that you might be required to get, but you should look into it if your property is located near a flood zone.
Some homeowners shopping strictly on price may unknowingly leave valuable personal items without protection just to save a few extra dollars a month.
This can come in a few different forms, depending on which type of loan you have.
Mortgage insurance is in addition to hazard insurance, and completely unrelated. A lender will require a borrower to pay mortgage insurance on a property with a loan-to-value greater than 80%. The main purpose of mortgage insurance is to protect from foreclosure losses if the borrower fails to meet the monthly payment obligations.
FHA has mandatory mortgage insurance, but in a different form.
VA loans have a separate funding fee to help protect their interests.
Mortgage Payment FAQ’s
Federal Regulations require that PMI be canceled when the principal balance on the mortgage reaches a certain point. Automatic termination of PMI normally occurs for many borrowers when their principal balance has been amortized down to 78% of the original property value.
The monthly payments on a 30-year mortgage are lower than those for a 10, 15, 20, or 25 year mortgage; however, a shorter term can offer a lower interest and shorter loan term which can save you a considerable amount of money as the loan amortizes.
Yes, your monthly payment can be automatically deducted from your checking or savings account.
You will be required to insure the property for at least the amount of the loan since the lender is looking to protect its investment in your property in the event there is a loss. However, the replacement value of your home may be considerably higher and the borrower should consider if there is sufficient replacement coverage in case there is a total loss.
Mortgage insurance operates very similar to the insurance you have for your vehicle. It protects against loss, requires payment of a premium, and is used in the case of an emergency. If the lender forecloses on the home because the borrower is not able to repay the amount of an insured mortgage loan, the lender can file a claim with the mortgage insurer for a portion or full amount of losses.
The second lien is often from a different lender than the first lien. Therefore, borrowers with a second lien will make two separate payments each month – one on the first lien and one on the second lien.
Refer to your “First Payment Letter” in your closing documents to determine where to send your first mortgage payment. If you receive a statement from your new lender prior to the due date of your first payment, send your payment to the new lender.
Otherwise, send your payment to The Mortgage Professional Corporation as detailed in your “First Payment Letter.” Remember to include your loan number on your check.