Mortgage Payment Breakdown: What’s Included In Your Payments
Unlike rent payments, mortgage payments are made up of several components. Understanding the makeup of a mortgage payment is important when determining how long it will take to pay off your home loan and what it will cost you over time. Additionally, knowing when and how you make payments will help you stay on top of your mortgage each month.
Let's take a look at what goes into your mortgage payment and your options for paying it off:
What Is A Mortgage Payment?
Your mortgage payment pays back your home loan and covers a few additional expenses. Usually, it’s a monthly payment that helps you pay off your mortgage step-by-step. It also includes the interest due to your lender, insurance payments and taxes.
The ability to make installment payments allows most people to buy a home that likely would have taken years to save up the cash to buy.
What Is Included In A Mortgage Payment?
PITI is an acronym for the four main components of a mortgage payment: principal, interest, taxes and insurance. Together, they make up what you pay on your mortgage every month. Understanding your potential PITI helps you and the lender determine what you can afford when shopping for a home.
Let’s take a closer look at the four main components of your monthly mortgage payment:
Your basic mortgage payment has two components: principal and interest. Principal is the total loan amount you borrowed to buy your home. It's factored into your monthly payment and paid off over the loan’s repayment term.
When you begin making monthly mortgage payments, the amount of principal you pay off each month is relatively low. As the loan ages, more of your monthly payment will go toward the remaining principal amount.
Interest is the percentage of the principal you pay to your lender as a fee for lending you the money. The amount of your monthly mortgage payment applied to interest will decrease as you pay down your loan. You may also be able to claim a mortgage interest deduction on your taxes to further offset the interest you owe each year.
If you have a fixed-rate mortgage, the percentage you pay in interest will stay the same for the life of the loan, no matter what happens with the real estate market.
Wherever you live, you'll pay a property tax on your home. What you pay is based on a percentage of your property value, which can change from year to year. Several factors determine the actual amount you pay, including the assessed value of your home and local tax rates. Typically, every county has its own taxation system.
If the assessed value of your property – which isn’t necessarily the same as the market value – increases, your property taxes will increase.
There are two main types of insurance that can factor into your mortgage payments:
- Homeowners insurance: Homeowners insurance works as a safety net to protect your home and finances in the event of an environmental disaster or an accident on your property. If something happens, your homeowners insurance typically covers the cost of repairs to restore your property value to where it was before the event.
- Mortgage insurance: Mortgage insurance doesn't apply to all homeowners, but if you make a down payment on your home that was less than 20%, you'll likely pay the Lenders require mortgage insurance to cover their investment if the loan goes into default. Depending on the type of home loan you have, you may pay private mortgage insurance (PMI) or a mortgage insurance premium (MIP).
The insurance portion of your mortgage payment and your property taxes may go into an escrow account to pay these costs.
How Mortgage Payments Work
Now that you know what goes into each payment, it's time to start paying off your mortgage:
When To Pay
After completing the mortgage loan process, your first mortgage payment will be due the first full month after closing. For example, if you close on June 9, your closing costs will cover the interest you would accrue for the rest of June. After that, your payment for July will be due on August 1.
While monthly mortgage payments are standard, your lender may allow you to opt for biweekly payments. A biweekly payment schedule may make your payments more manageable because they’re cut in half.
How To Make A Payment
Just as you might go online to make a car insurance or phone bill payment, you can pay your mortgage online, too. You can still make payments by mail or phone, but the ease and convenience of online payments makes it a popular option for most homeowners, especially because you can set up automatic payments through your bank or directly with your lender.
You should keep in mind that mortgage payments can change. The amount you pay for taxes and insurance may go up or down every year. The same is true if your adjustable-rate mortgage (ARM) is at the end of its fixed-interest period.
If you set up an automatic payment through your lender, your payment amount will never be insufficient, and you can rest assured knowing you're not overpaying when your escrow amount or interest rate goes down.
Making Extra Payments
If you can afford it, paying extra toward your mortgage principal can potentially save you thousands of dollars in the long run. Whether you pay a little extra every month or make an extra payment during the year, the total interest you pay is reduced, and you may be able to pay off your mortgage early.
If your main goal is to build equity or save money on interest, paying extra on your mortgage every month might make sense for you. But before you start making extra payments, check with your lender to find out if your loan has a prepayment penalty clause.
PMI is typically no longer required once the home's loan-to-value ratio (LTV) reaches 80% or less. LTV compares how much you borrowed with the value of the home you're borrowing against. It's calculated by dividing the amounts borrowed by the home's value, and it’s generally expressed as a percentage. By law, PMI must be removed once the home's LTV reaches 78% based on the original payment schedule at closing.
You typically won't pay a penalty if you're only a few days late on your mortgage payment. Most lenders provide a grace period for borrowers, allowing them to make a late payment without paying a late fee. Most grace periods are around 15 calendar days, but you should verify this with your lender.
It's important to contact your lender if you think you might miss a mortgage payment. Waiting to resolve the issue may lead to defaulting on your loan. You could face late payment fees, penalties and a drop in your credit score, which you'll need to repair before applying for future loans. Falling behind on your payments can also lead to possible legal action and foreclosure.
Your lender may be able to offer options to help you get back on track with your mortgage payments.
Using A Mortgage Calculator For Your Monthly Payment Breakdown
Calculating a mortgage payment can be tricky. A mortgage calculator is the best way to estimate what you'll owe each month. It can also be a great way to assess how your down payment will affect your monthly payments, which may help you decide how much to put down.
Here's what you'll need to get started:
- The home’s price
- The down payment amount
- The loan’s term
- The interest rate
- Annual taxes
- Annual insurance
- Monthly homeowners association (HOA) fees (if any)
The Bottom Line
Paying a mortgage is a huge commitment, so there's no such thing as being too prepared. Knowing what goes into a mortgage and how you’ll manage the payments will better prepare you for the future as you figure out how much you can afford on a house.
If you're ready to buy a home, get started online today.