Studies show that the most confusing part about homeownership is getting a mortgage. If you’ve considered buying a home and are not sure where to get started, this article is for you.
In this article we will go over:
What’s in a mortgage
Mortgage payment components
How mortgage payments work
Calculating your mortgage payment
What’s In A Mortgage?
Your mortgage payment is how you will pay back your home loan. Payment is usually made once a month that goes towards paying off your mortgage. Your mortgage will include interest, insurance, the price of the home, and taxes. Most people can’t buy a home with all cash so instead, they finance the home with a low interest rate.
Mortgage Payment Components
A term to get familiar with in the mortgage world is PITI. This is an acronym for the main components of a mortgage payment. Principal, interest, taxes, and insurance. All together makeup what you pay every month on your mortgage. This will also help you determine what you can afford when house shopping.
The principal is the amount you initially borrow from the lender to buy your home. This is included in your monthly payments and will be paid off throughout the life of the loan. When you purchase your home, the amount of principal you pay is normally low but as the loan ages, more of your monthly payments will go towards the remaining principal.
Interest is the percentage of the principal that you pay to your mortgage company as a fee for lending the money. Your interest payments will decrease as you pay down your loan.
You will always have to pay property taxes on your home. The amount you pay in taxes depends on the value of your home. Taxes can vary from year to year. The amount you pay depends on a few things, the value of your home and local tax rates. This varies by county as they have their own taxation system. Property taxes pay for things like schools, roads, fire departments, and local parks in your community. Keep in mind, if your property increases in value, so will the taxes you pay on your property.
There are two different insurances that can factor into your mortgage payments. Homeowners insurance and mortgage insurance. You aren’t required to have homeowners insurance to own a home, but most lenders won’t give you a loan unless you have insurance. Homeowners insurance protects your home in the event of natural disasters, break-ins, fires, and so much more. It can also cover the cost of repair to bring your property value back to where it was before any incident. Mortgage insurance is also known as PMI (private mortgage insurance) doesn’t apply to everyone. This will be added to the loan if you put less than a 20% down payment. Low down payments can be seen as risky to lenders, they will require mortgage insurance to cover their investment.
How Mortgage Payments Works
Your first mortgage payment will be due a month after your closing date. So for example, if you closed on August 10, your closing costs will cover the interest you would have for August. Afterward, your monthly payment for the month of September will be due on October 1st. Monthly mortgage payments are most common, but your lender may give you the option to make biweekly payments. There are a few ways you can make a payment, online, by mail, or phone. Paying online is the safest and most convenient way to make a mortgage payment. One of the reasons for this is you can set it up to be automatic payments.
Calculating Your Mortgage Payment
Calculating your monthly mortgage payment isn’t as complicated as you think. You’ll need some information about your loan and a mortgage formula. Here’s the information you’ll need:
Down payment amount
Monthly HOA fees (if any)
P [ i (1 + i)n ] / [ (1 + i)n – 1] = Monthly Mortgage Payment
To calculate your payment, take your annual interest rate and divide it by twelve. This will give you the monthly interest rate, which is the “i” variable. Afterward, take the length of the mortgage (years) and multiply it by 12. This will give you the total number of payments needed on the mortgage to use as “n”. The variable “P” is the principal owed on the loan.
A mortgage is a big commitment that will be with you for a good amount of years. Be prepared and know what goes into a mortgage and how you can manage the payments. If you’re ready to buy a home and want top-notch service, we’re here to serve you! Contact us today or apply with me online to go over your options.