Understanding The Mortgage Payment

Understanding The Mortgage Payment

Unfamiliar or unsure about what a mortgage is? Lets break it down so you can get a better understanding of a mortgage payment.

Because houses cost so much money, most people need to take out a loan to buy one. This loan is called a mortgage. Any time you borrow money, there is a written promise to repay the loan, this is called promissory note. With a mortgage you make that promise plus agree to set the house as collateral, meaning you will give the house back to the lender if you don’t make your loan payments.

Your mortgage payment usually has a few different parts: principal, interest, taxes, and insurance, otherwise known as PITI.

Principal– The amount you have borrowed to purchase the house. This part of the mortgage pays off what you borrowed.

Interest– The amount the lender is charging you to borrow the money. It is usually a percentage of the loan amount. With interest you will end up paying the lender back more than you originally borrowed.

Taxes– The tax portion is used to pay property taxes on your home each year. The taxes are based on how much your home and land are worth. Taxes are used to help support public schools, road maintenance, public safety and more.

Insurance– The insurance portion is used to pay homeowners insurance each year and sometimes mortgage insurance. Your lender requires you to have homeowners insurance in case there is a fire or similar event. Your coverage will be based on the worth of your home and includes casualty and liability.

Typically a lender will figure out the total amount you will owe each year for taxes and insurance and then ask you to pay one-twelfth of that amount each month. The lender puts those funds into a separate “escrow” account, and when your bills come due, the lender pay them for you. As taxes and insurance costs may go up over time, the amount the lender collects each month may go up as well. Not all mortgage loan payments include money for taxes and insurance, you will want to check with you lender. If it is not included you will have to save money each month to pay your tax and insurance bills when they are due each year.