Understanding the components of your mortgage payment can help you manage your finances more effectively and even save money in the long run. Here’s a closer look at what you’re really paying for each month.
What is Principal?
The principal is the original amount you borrow from your lender, excluding interest. Each monthly payment you make includes a portion that goes toward reducing this amount. Paying extra toward your principal can help you pay off your loan faster and reduce the total interest you pay overtime.
What is Interest?
Interest is the cost of borrowing money from your lender. It’s calculated based on the interest rate you agreed to when you took out the loan. Shopping for competitive interest rates or refinancing later can significantly impact your monthly payments and the total cost of your loan over its lifetime.
What Taxes Do I Pay on My Home?
Property taxes are determined by your local government and help fund essential community resources like emergency services, road maintenance, and public schools. Your lender typically collects these taxes through an escrow account. The funds are then used to pay your taxes when they’re due, whether that’s quarterly, semi-annually, or annually, depending on your location.
What is Homeowners Insurance?
Homeowners insurance protects your home and belongings from damage, theft, or other losses. If disaster strikes, this insurance helps cover the costs of repairs or replacement.
Another type of insurance you might encounter is private mortgage insurance (PMI). Lenders often require PMI if you put down less than 20% of the home’s purchase price. PMI protects the lender and can usually be canceled once you’ve paid off at least 20% of your home’s appraised value.
Other Expenses to Know About
- HOA Fees: If your home is part of a community with shared amenities or maintenance services, you may be required to pay homeowners association (HOA) fees. Be sure to ask about these fees when considering a property.
- Mortgage Insurance Premium (MIP): If you have an FHA loan, you’ll pay a mortgage insurance premium (MIP) instead of PMI.
Calculate Your Mortgage Payment
Use our mortgage calculator to estimate your monthly payment.
What is Pre-Approval for a Home Loan?
Getting pre-approved for a home loan is a crucial first step in the home-buying process. Pre-approval determines how much you’re qualified to borrow based on your credit score, income, and debt. This not only gives you a clear picture of your budget but also makes you a more likely to close the sale. Sellers are more likely to accept your offer if you’re pre-approved because it shows you’re serious and financially prepared.
If the pre-approved amount feels too high for your comfort, consider looking at homes with lower price points to ensure your monthly payments align with your budget.
Final Thoughts
Understanding the breakdown of your mortgage payments empowers you to make informed financial decisions. Whether it’s shopping for a better interest rate, paying down your principal faster, or budgeting for taxes and insurance, knowing where your money goes can make homeownership more manageable and rewarding.
Our local mortgage lending officers are ready to help you get started on your homebuying journey. Schedule a phone call today with an Honor Mortgage expert.
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