Understanding the basics behind your mortgage payment
If you’re shopping for a mortgage loan, you may want to start by learning the basic components behind your mortgage payment. Understanding what goes into your mortgage payment, can help you make a smart decision about the mortgage loan that’s right for you.
What’s in a mortgage payment?
Your mortgage payment consists of more than just principal and interest. In fact, there are several different components that factor into your mortgage payment. Mortgage payments are made up of four different parts – principal, interest, taxes and insurance (collectively known as “PITI”).
Principal
The portion of the mortgage payment that represents the money you borrowed. Typically, during the earlier years of the loan term, a smaller portion of the mortgage payment is applied towards repaying the principal balance of your loan, but this amount increases during the life of the loan.
Interest
The amount that the lender charges for borrowing money. Typically, during the earlier years of the loan term, most of the mortgage payment is applied towards paying off the interest on your loan. But as time goes on, more of the monthly payment will be applied towards reducing the principal balance.
Taxes
If an impound account is used, part of the mortgage payment is placed into an escrow account and used to pay your property taxes. Taxes can be a significant part of your mortgage payment depending on where you live. Be sure to check the local tax rate before you purchase your home to help you determine how much mortgage payment you can reasonably afford.
Insurance
If an impount account is used, part of the mortgage payment is used to pay your homeowners and/or private mortgage insurance.
- Homeowners insurance protects your property against fire, wind or other types of hazards. Depending on where you live, you may also need to obtain supplemental coverage for other types of risks which might be more common to the area, such as floods, earthquakes, etc.
- Private Mortgage Insurance (PMI) is an insurance that lenders require when homeowners purchase a home with less than a 20% down payment. PMI protects the lender against loss if the borrower defaults on a loan. However, it also benefits the borrowers by helping them qualify for a mortgage with less than a 20 percent down payment. The good news is that once the equity in the property reaches 20% (typically achieved through a combination of paying down the principal balance and appreciation in the property value) you can request a cancellation of PMI or depending on the provisions of the loan, it might terminate automatically. Check with your lender for details.
Shopping for a mortgage?
If you’re shopping for a mortgage and need help calculating payments, Countrywide’s home loan experts can help you estimate mortgage payments to help you compare fixed and adjustable rate mortgages, help you find out how much mortgage you can reasonably afford and qualify for, help you select from a range of mortgage options and more. Call us today at 1-866-436-0620 for a FREE, no obligation consultation.
