What's Included In Your Mortgage Payment? A Cost Breakdown
Unlike the simplicity of rent payments, mortgage payments are made up of several components. Understanding the structure of a mortgage 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 is how you pay back your home loan. Usually, this will be a once-per-month payment that helps you pay off your mortgage step-by-step. It will also include interest due to your lender, insurance payments and taxes.The ability to make installment payments is what enables most people to buy a home that would otherwise cost hundreds of thousands of dollars in cash. The way these payments are scheduled over the life of your loan is known collectively as mortgage amortization.
Mortgage Payment Breakdown
As a homeowner, you’re likely to encounter unfamiliar terms and jargon relating to mortgages. One of these terms is called PITI, 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. This helps both you and the lender determine what you can afford when shopping for a home.
The basic mortgage payment consists of two components: principal and interest. Principal is the amount you initially borrow from a lender to buy your home. It's factored into your monthly payment and paid off throughout the life of your loan.
Once you purchase a home and begin making payments, the amount of principal you pay each month is relatively low. As the loan ages, more and more of your monthly payment will go toward the remaining principal amount.
Interest is the percentage of the principal you pay over the life of the loan to your mortgage company as a fee for lending the money. The amount that goes to interest will continue to decrease as you pay down your loan.
No matter where you live, you’ll pay a property tax on your home. The amount you pay is based on a percentage of your property value, which can change from year to year. The actual amount you pay depends on several factors, including the assessed value of your home and local tax rates. Typically, every county has its own taxation system.
If the assessed value – not necessarily the same as the market value – of your property increases, the taxes you pay on your property will increase with it.
There are two main types of insurance that can factor into your mortgage payments:
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 were to happen, your homeowners insurance would typically cover the cost of repairs to bring your property value back to where it was before.
Mortgage insurance doesn't apply to everyone, but if you can’t make a sizable down payment on your home, you’ll likely have to pay a premium. Since low down payments are risky for lenders, they might require mortgage insurance to cover their investment if the loan goes into default. Depending on the type of loan you have, you might pay private mortgage insurance (PMI) or a mortgage insurance premium (MIP).
Along with taxes, the insurance portion of your mortgage payment may go into an escrow account to pay back those costs.
How Mortgage Payments Work
Now that you know what goes into each payment, it's time to start paying off your loan.
When To Pay
Your first mortgage payment will be due after the first full month following your closing date. 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 the month of July will be due on August 1.
While monthly mortgage payments are most common, your lender may give you the option to make biweekly payments. With a biweekly payment schedule, your payment becomes more manageable because it’s cut in half. Quicken LoansⓇ offers monthly and biweekly payments without charging additional fees.
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 in the same way. You can still make payments by mail or phone, but the ease and convenience of paying online makes it a more favorable option among most homeowners. One reason for this is the ability to set up automatic payments, either through your bank or directly with your lender.
You should keep in mind that mortgage payments sometimes change. The amount necessary for taxes and insurance may go up or down every year. The same is true if you’re in an adjustable-rate mortgage (ARM) at the end of its fixed period. By setting up an automatic payment through a lender as opposed to the bank, you can make sure the payment isn’t too low and that you’re not overpaying when your escrow or rate goes down.
Making Extra Payments
If you have the means, paying extra toward your 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 throughout the year, the total interest you pay is reduced, and you could potentially 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.
Before getting started, you should check with your lender to find out if there's a prepayment penalty for your loan.
PMI is typically no longer required once the home’s loan-to-value ratio (LTV) is 80% or less. LTV compares how much you borrow with the value of the home you’re borrowing against. It’s calculated as the amount to be borrowed divided by the home’s value and is 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.
Typically, you won’t have to pay a penalty if you’re only a few days late on your mortgage payment. Most lenders provide a grace period for borrowers to make a late payment without having to pay an additional late fee. Most grace periods are around 15 calendar days, but you should verify this with your lender to be certain of their late payment policy.
It’s important that you contact your lender if you’re going to miss a mortgage payment. Waiting to resolve the issue can lead to defaulting on your loan. Consequences could include late payment fees, penalties and a drop in your credit score, which you'll then need to repair for future loans.
Falling behind on your payments can also lead to legal action and foreclosure. Your lender can offer you several options designed to help you get back on track with your mortgage payments.
How To Calculate Your Mortgage Payment
You can calculate your monthly payment manually – excluding taxes and insurance – by using a standard formula, where M equals your monthly payment, P equals your principal, r is your interest rate and n is the total number of payments:
M = P[r(1+r)^n/((1+r)^n)-1)]
With that said, a mortgage payment calculator is the best way to see what you'll owe each month. It can also be a great way to assess how your down payment affects your monthly payments, which in turn might help you decide how much you're going to put down.
Here's what you'll need to get started:
- Home price
- Down payment amount
- Loan term
- Interest rate
- Yearly taxes
- Yearly insurance
- Monthly HOA fees (if any)
The Bottom Line: Get To Know Your Mortgage Payment
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 can manage payments will better prime you for the future as you figure out how much house you can afford.
If you’re ready to buy a home and want the convenience of a fully online mortgage experience, we’re here to help! Apply online today to discover your options.