How Is My Monthly Mortgage Payment Calculated?
March 25, 2021
Unless you purchase your home with cash, you will be required to pay a monthly mortgage payment to your lender. Mortgage payments are a bit more complex than rent payments, as they include 4 main parts – in addition to any other fees you owe – and you may not be familiar with the terms used to talk about mortgages. Read on to learn more and find out the answer to the question, “What makes up a mortgage payment?”
Components of Your Payments
Your mortgage payment has 4 main parts. The acronym PITI, which stands for principal, interest, taxes, and insurance, represents these, and of them, the principal and interest make up the majority of your payment amount.
Your mortgage principal is the amount you initially borrowed from your lender to cover your home’s cost. This amount is spread out and paid over the life of your loan, with the majority of the principal amount paid over the last half of your loan. However, you will pay the same amount in principal over your loan’s duration with a fixed interest rate mortgage.
Your interest rate is what you owe the bank for borrowing the money to purchase your home. As with principal, this amount is spread out and paid back over the months of your loan.
One important thing to remember about interest rates is that they are compounded, meaning the amount you pay is based not only on the initial principal but also on the interest you accumulate as your loan progresses – it is essentially paying interest on interest.
The term mortgage amortization is used to describe how when you first begin paying off your mortgage, most of the money goes to the loan’s interest. As the loan matures, more of what you pay is applied to the principal. Conversely, the amount of your mortgage payment that goes to the loan’s interest starts higher and decreases as the loan ages.
If you own a home, you will pay property taxes. This amount fluctuates because it is tied to your property value, which can increase or decrease based on how your county of residence assesses your home’s worth. When your property value increases, your property taxes likewise increase and vice versa. Your property value differs from your market value in that your property value is assessed in light of your taxes, while your home’s market value is how much a potential buyer would be willing to pay for it.
Property taxes take lien priority over the other aspects of your mortgage because if you default on your payment, you could be subject to immediate foreclosure proceedings.
Your required homeowner’s insurance, otherwise known as property insurance, acts as a safety net to protect you from losses or damage in the case of the following:
- Exterior damage
- Interior damage
- Damage to or loss of personal property
- Injury occurring on your property
If one of these happens, you will be required to pay a deductible before your insurance company pays for claims.
Other Notable Terms
In addition to PITI, there are other terms to know concerning your mortgage. These include escrow accounts, PMI, and homeowners dues (HOA).
An escrow account is a means of holding money for your property tax and insurance premiums, usually collected in your monthly mortgage payment. Your mortgage lender will check annually to ensure the amount going to escrow is appropriate and adjust as needed, paying these costs using this account’s money.
Private Mortgage Insurance
If your mortgage lender required you to obtain private mortgage insurance (PMI) due to the amount of your down payment or other considerations, that amount would also be part of your monthly payment.
Count on the Winning Team at The Mortgage Firm
When it comes to calculating what your monthly mortgage payment will be, The Mortgage Firm Gainesville makes it easy. You can use our convenient mortgage payment calculator or reach out to the experienced lending team at TMFG to guide you. Once you understand your mortgage payment’s components, you can make better decisions about what you can realistically afford. And, no matter your mortgage question, we have the answer. Contact us today to get started on your journey home.