When You Pay The Mortgage...What's Actually Covered??

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You've finally decided to buy a house, right? Congratulations! Before you start picking out a beautiful birdbath and the perfect welcome mat for your home, you should think about the following: Is your budget set up to handle the monthly payments on a mortgage?

If you don't pay for your purchases with cash, this is a very important question to ask. You need to take a number of important steps to find a home that fits your long-term goals. For example, you need to figure out how much house you can really afford and what exactly is included in a monthly mortgage payment.

Let's look at what goes into a typical monthly mortgage payment so you can better understand what you're paying for, why you're paying it, and how long you'll be doing it.

When you pay your monthly mortgage payment, what do you get for your money?

Don't let yourself get caught in this trap. A "monthly mortgage payment" is what most people think of when they hear the phrase "paying off your mortgage." However, paying off your mortgage is only one part of that phrase. Instead, think of the four parts of a monthly mortgage payment—principal, interest, property tax, and homeowner's insurance—as the "four horsemen" (also known as PITI, which is pronounced "sad" because it raises your payment).

How can these people be in the same boat as you when it comes to your monthly mortgage payment? You can figure out the answer by using our mortgage calculator.

Principal

The first payment on a mortgage is made to the principle. The first amount of money you borrow from your lender to buy a house is called the "principal."

Consider the following situation: you put $40,000 down on a $200,000 house and borrow the other $160,000 to pay for it. This means that the primary balance at the start of the period is $160,000. It looks like an easy thing to do. But wait, if you think the principal is the only thing you need to think about, you're ignoring the best friend of the principal, which is interest.

Interest

It would be nice to think that banks give you loans just because they like you. Even if that is true, they still have to run a business and make money to support themselves and their families. Lenders are eager to let you borrow money from them so that they can make money off of the money you borrow. The amount you still owe on the loan is called the principle, and interest is calculated as a percentage of that amount.

The amount you still owe on the loan is called the principle, and interest is calculated as a percentage of that amount.

Since mortgage interest rates change all the time, it's best to choose a mortgage product with a fixed interest rate. This way, you'll always know exactly how much you'll have to pay each month. When you have crazy adjustable rate mortgages (ARMs), which have variable interest rates, the total amount of interest you pay from one year to the next can be as unpredictable as the wind. Avoid ARMs at all costs (or any other loans that sound like body parts).

Since mortgage interest rates change all the time, it's best to choose a mortgage product with a fixed interest rate. This way, you'll always know exactly how much you'll have to pay each month.

Let's look at how this works out with our example of the $200,000 house that needs a 20% down payment. Your remaining principal balance is $160,000, and you have agreed to pay it off over 15 years at a fixed interest rate of 4%. If you chose that option, the first month's mortgage payment would cost you a whopping $533.

How do you figure out how much to pay each month in principal and interest?

Get ready for a quick math problem. But don't worry, it's not that hard to figure out! If we put in a $160,000 mortgage with a fixed rate for 15 years and use our mortgage calculator, we find that the total interest cost is almost $53,000. (There is a really hard formula to figure this out, but using our mortgage calculator makes the process much easier! (You're welcome.)

This means that by the time you finish paying for your house, you will have spent a total of $253,000. (this amount includes the down payment). If you did it this way, your mortgage payment would be $1,184 every month.

As Time Goes By...

Your payment will stay the same at $1,184 the following month, but the amount that goes toward interest will go down to $531 and the amount that goes toward your principal will go up to $653. This will keep happening as long as you have a mortgage, and by the end, the vast majority of your payments will have been put toward the principle balance. And that's the point: to enjoy your property while paying it off as quickly as you can. Here we come with the confetti!

Taxes

When you buy a home in a new neighborhood, your local government will "welcome" you by raising your property tax. Even if you bought your home with cash, you will still have to pay property taxes. This is because those taxes pay for things like the police, firefighters, schools, and roads.

When do you pay taxes on your property?

Even if your local government only taxes your property once a year, you can add those taxes to your monthly mortgage payment. In addition to your regular mortgage payment, you have to pay a portion of your annual property taxes every month. Most of the time, your lender will put these payments into what is called a "escrow account." At the end of the year, a company that handles escrows will take all of the money out of your account, use it to pay your property taxes, and then close your account. You won't remember something if you can't see it. What a load was taken off!

What goes into figuring out how much your property taxes will be?

People often get this wrong because property taxes are based on the assessed value, not the market value, of the home.

How do these two things differ? The market value of your home is the price you agreed to pay for it. On the other hand, a property assessor is the person who decides how much your home is worth. This person will come to your property, look at it, and then tell the government in your area what they found.

For example, you might buy a house for $200,000, but a property assessor might tell you it's only worth $140,000. If the local county tax rate is 1%, the total amount of property tax you have to pay each year is $1,400, and the total amount you have to pay each month is $116.

Insurance

Finally. The last part of PITI is insurance, which brings us to the end. There are no ifs, ands, or buts about the fact that everyone who buys a home has to have homeowners insurance. That doesn't always have to be a bad thing. Homeowner's insurance moves the risk of having to pay to fix or rebuild your home (your biggest investment!) in the event of a disaster like a fire or tornado from you to your insurance company, relieving you of the financial burden of doing so. What a load was taken off!

When is your homeowner's insurance payment due?

You must have had a fancy escrow account when you paid your property taxes, right? So, what are your thoughts? It has come back. Along with your principal and interest payment, you also have to pay a portion of your homeowner's insurance premium. The same is true for your property taxes. Your lender will put these payments into an account, and when your annual insurance payment is due at the end of the year, your insurance company will take the total amount from that account.

How much does your homeowner's insurance cost each year?

The amount of homeowner's insurance you need to buy is the most important thing. If you're having trouble figuring out how much homeowner's insurance you need, talk to an independent insurance agent. They will help you get the cheapest rate possible without lowering the amount of coverage you get (which unfortunately a lot of homeowners do).

Let's make our example more realistic by adding the cost of homeowner's insurance so we can get a better idea of what a fully-loaded monthly mortgage payment will look like. Let's say that the monthly premium for your insurance is $75. After this extra charge, your total payment for the month is now $1,375.

Other costs that could show up in your mortgage payment.

PITI stands for principal, interest, taxes, and insurance. However, you may have to pay extra costs for your mortgage, such as private mortgage insurance and/or fees for your homeowners association.

Private Insurance for Mortgage Protection (PMI)

PMI is not made to keep its users safe. Its goal is to protect the lender from the borrower, or at least from the possibility that the borrower won't be able to make the mortgage payments or won't even try. You don't have any of those things, but the lender doesn't care.

If the amount you put down (the down payment) is less than 20% of the home's price, you will have to pay private mortgage insurance (PMI). This is another reason why you should put 20% of your income toward a down payment.

Private mortgage insurance (PMI) premiums are usually calculated by adding 0.5% to 1.5% of the main loan amount to the monthly mortgage payment. For example, if you borrowed $180,000 and your PMI payment was 0.5 percent of the loan, your total payment would go up by $900 a year, or $75 a month. $900 per year more! Think about everything else you could buy or do with that money.

Fees paid to homeowner associations (HOAs)

A HOA fee pays for the upkeep of the property and any shared services or amenities in private residential communities like gated communities, townhouse developments, or condominium associations. In short, they make sure that your place always looks good. If you live in a neighborhood like one of these, don't forget to pay your homeowners association dues. Depending on how old your home is, how big it is, and what kind of amenities it has, this could add anywhere from $50 to $350 to your monthly housing costs.

Get a mortgage that fits your realistic budget.

There are many different kinds of mortgages, and each one needs a different amount of money to be paid each month. But you should be careful not to choose a mortgage just because it has the lowest monthly payment. If you want to make money that will last, pay attention to the total cost. The type of mortgage that costs the least in the long run is a conventional loan with a 15-year term and a fixed interest rate. If the monthly payments are less than 25% of your monthly net income, this is a good sign that you will be able to pay for a mortgage.

If you want to buy a home and need help finding a great one that fits your budget, you must work with a top-notch real estate agent who can help you find the home of your dreams. If you want to get a mortgage in the smartest way possible, you should talk to our friends at Churchill Mortgage. They will be with you every step of the way to help you find the best way to become a homeowner.

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