You probably already know that a mortgage is a type of loan used to purchase a home. But you might be wondering how your mortgage payment is determined and what it is made up of. The cost of your mortgage will depend on the type of loan, the interest rate, and length of the loan term (for example, 30 years). In this article, we will explain the different pieces of a mortgage payment, how it’s calculated, and other costs you should consider when budgeting for your new home.
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PITI- Principal & Interest, Taxes and Insurance
A mortgage payment is made up of four parts: Principal, Interest, Taxes, and Insurance, also known as PITI. Principal refers to the amount of money borrowed. Interest is the amount of money owed to the bank for the loan you borrowed. Principal & Interest, or P&I, make up most of your payment. Property taxes are calculated based on a percentage of your home’s value, assessed by the local tax collector. Home insurance is a policy that you take in order to protect your home in case of losses and damage. Your insurance premium will vary depending on your home’s age, value, and the coverages you prefer.
Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP)
Depending on your loan and your down payment, you may be responsible for paying mortgage insurance. This payment provides protection to the lender in case the borrower is unable to make monthly payments. There are two main types of mortgage insurance: Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP).
Private Mortgage Insurance (PMI) is for conventional loans (programs that are not backed by the government) and is usually required when a down payment is below 20%. Typically, you can request to remove PMI once you reach 20% equity in your home (note: it’s usually cancelled automatically once you reach 22% equity).
Paying a Mortgage Insurance Premium (MIP) is required for FHA (Federal Housing Administration) loans. The Mortgage Insurance Premium consists of two parts: a one-time single premium paid upfront and normally financed into the loan, and a small monthly premium included in your mortgage payment. Depending on how much you put down, this monthly mortgage insurance may be required from anywhere between 11 years to the lifetime of the loan. To remove MIP, you can refinance to a conventional loan. Keep in mind that you would need a Loan-to-Value (LTV) ratio of 80% or less if you want to avoid PMI on your new conventional loan.
What is Escrow?
When you obtain a mortgage, your lender might require you to set up an escrow account. This is usually set up at the same time as your loan and is maintained by the lender. A portion of your mortgage payment will go into the escrow account. When the property taxes or insurance premiums are due, your lender will use the funds from the escrow account to make the payment on your behalf. Escrow account can help to reduce the stress when it comes to making a large payment annually for property taxes or insurance premiums by breaking it down into twelve equal payments that are part of your monthly mortgage payment. It’s important to keep in mind that over time, your escrow payment may fluctuate depending on changes to property taxes and home insurance costs.
Calculating Your Mortgage Payment
It’s a good idea to fully understand the cost of your monthly mortgage and how it may impact your budget. One way to look at your monthly costs is to use a mortgage calculator, which can help you determine what your potential mortgage would look like. Take a look at our How to Use A Mortgage Calculator blog to learn more about determining your estimated monthly mortgage, based on your home price, down payment, loan program and interest rate. You can also include mortgage insurance as well as property tax, home insurance, and HOA dues to help give you a more complete understanding of what your estimated payment amount will be.
Other Costs to Consider
In certain communities, you may be responsible for Homeowners Association (HOA) fees, which typically cover maintenance of common areas, entrances, amenities and more. These fees are not part of your monthly mortgage payment, but you are still responsible for paying your HOA dues on time each month. Dues may be required monthly, quarterly, or annually depending on the association.
Utilities are another important consideration when it comes to your monthly expenses. If you are purchasing a home, you can request information on current utility expenses to help you set a budget. This can also help you to identify ways to optimize your energy use by installing a smart thermostat or switching to energy efficient lights and appliances.
There are a lot of elements that go into calculating your monthly mortgage payment. The loan amount, interest rate, loan type and loan term. It’s important to take time to assess the overall cost of your mortgage payment. Connect with an experienced mortgage professional who can help you better understand what you can afford and the best way to budget.
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Why Choose FBC Mortgage?
FBC Mortgage, LLC is a leader in helping home buyers with fast and simple loans. We’re dedicated to exceptional customer service and are always available when you need us most, even at night and on the weekend. We’ll help you navigate your new home purchase, and keep you updated along the way with weekly check ins, so you know you’re taken care of. That’s one of the many reasons why 95% of our clients would recommend us to their friends and family. It’s also why the nation’s top home builders and Realtors trust FBC to help their new home buyers.
Buying a home is one of the most important financial decisions you will make. Understanding mortgages and the home buying process can help make it less stressful, and so can partnering with a mortgage lender you can trust. At FBC Mortgage, LLC, we’re dedicated to helping home buyers finance their dream home.
All information presented is for educational purposes only and not intended as financial advice. FBC Mortgage, LLC is a national mortgage lender headquartered in Orlando, Florida. Specializing in residential mortgage lending, including purchase, refinance, construction, and renovation loans. See what our clients have to say. NMLS#152859 EHL ©2024.
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