What else are you paying when you pay your mortgage?

What else are you paying when you pay your mortgage?

If you have a mortgage, itís most likely the largest payment you make every month. But have you every stopped to think about the costs that make up that monthly mortgage payment?

Published Wednesday, April 1, 2015

If you have a mortgage, it’s most likely the largest payment you make every month. But have you every stopped to think about the costs that make up that monthly mortgage payment? Sure, a portion of what you pay goes toward the principal, or the actual amount you’ve borrowed, as well as the interest you’re paying on the principal. But if you’re like most homeowners, that’s not all you’re paying when you write that check each month.

Most mortgages also include the cost of taxes and insurance in the monthly payment. In some cases, additional high-risk insurance is also included. Below is a breakdown of the components, often referred to as PITI, that make up your mortgage payment.

Principal: This is the original amount you borrowed to buy your home. Such factors as income, credit score and your down payment amount all played a role in determining the amount of your loan.

Interest: This is the actual cost of borrowing money. Your interest rate can vary and much like the principal, the rate is dependent upon your income and credit history. A lower credit score usually results in a higher interest rate, making the money you borrow more expensive.

Taxes: These are your property taxes and they’re determined by the assessed value of your land and home. Property taxes are allocated to your city, school district, county, and state.

Insurance: Typically this is simply homeowner’s insurance that protects your property against theft, fire and other catastrophic events. Another type of insurance that falls into this component is private mortgage insurance (PMI). If you’re paying PMI, it means you are a high-risk borrower or you weren’t able to put the standard 20% down payment towards the cost of your home mortgage. It basically protects the lender should you default on your loan. In many cases, once you have paid a certain amount on your mortgage, typically proving you have reached 20% equity in your home, the PMI can be cancelled. However, cancellation of this insurance usually requires a new appraisal of your home to ensure the value is at least 20% greater than the amount you still owe.

Since taxes and insurance are due annually or semi-annually and not monthly as you make your mortgage payment, that money is held in escrow. Escrow is a bank account that’s set up by a third party solely for the purpose of keeping your money safe until the payments are actually due. The payments are made automatically so you don’t have to worry about writing additional checks to cover those costs.

To learn more about the components that make up your mortgage, click on the following links:

http://www.learnvest.com/knowledge-center/mortgages-101/2/

http://www.investopedia.com/university/mortgage/mortgage3.asp

http://www.forbeginners.info/mortgage/mortgage-basics.htm

http://www.homeloanlearningcenter.com/MortgageBasics/WhatsinaMortgagePayment.htm

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