You’re now the proud owner of a mortgage – congratulations! But do you know what your mortgage payments include, and everything that goes into making up that monthly payment you’ll be making for the life of your loan (or until you decide to sell)?
First, obviously, part of your mortgage payment includes repaying your original loan amount – unless you’re purchasing your property with cash. Your mortgage payment includes the principal amount of your loan together with the interest on that principal. The amount that goes toward your principal payment whittles down the total principal amount of your loan and another portion pays the accrued interest. Your payment is calculated based on the total amount of you borrowed, your loan’s length, and your interest rate. If you have a fixed-rate loan, your monthly payment won’t change over the loan term, but each month more of your payment will be applied to principal and less to interest. In the beginning, a larger portion of your monthly payment will be applied to paying interest; however, as time goes on more of your payment will be applied to cover the principal.
Another part of your mortgage payment includes your property tax. Your tax rate is determined by where you live, and they’re determined by your local government based on your home’s estimated value. Property taxes may increase your mortgage payment by hundreds each month, depending on these factors. But as you’re gritting your teeth while you write that check, remember – that money goes into your community, and helps build up valuable infrastructure, schools and cover other public expenses.
Lastly, your mortgage payments include your insurance. There’s the kind of insurance that covers basic homeowner issues, such as theft and fire, and then there’s Private Mortgage Insurance, also known as PMI. PMI is added into your mortgage if you didn’t put down 20%, and helps protect your lender just in case you default on your loan.
Of course, there are other financial considerations when it comes to home ownership, such as monthly HOA fees, costs associated with repairs and renovations, added insurance for natural disasters, plumbing and electrical needs, and various other costs that can add up over time as you continue to care for and evolve your home. Make sure you’ve got a budget in place to help you take care of everything that may come on top of your monthly mortgage payment, too. It always pays to be prepared!