You find the perfect house online, and that estimated mortgage payment is perfect, right? Exactly what you want to spend! But then you get your actual monthly payment and it’s higher. What’s changed?
A monthly mortgage payment is actually made up of four parts: principal, interest, taxes, and insurance. This is also referred to as PITI.
- The principal is the amount of money that is borrowed to buy a home. It is calculated based on the loan amount, which is the purchase price of the home minus any down payment, as well as the interest rate (discussed below) and term, or length of the loan.
- Many borrowers start with a 30-year loan, but there are other options such as 25-, 15-, and 10-year options.
- Interest is what the lender charges you to borrow the money. The interest rate may stay the same, or it could fluctuate over the life of your loan, depending on what loan type you get.
- If you get a fixed rate mortgage (most common), your interest rate will not change. It will be locked in during the loan process, and will not change unless you refinance into a new loan agreement.
- If you get an adjustable rate mortgage, the rate will change over the life of the loan. Typically, this loan gives a lower initial rate for the first 5, 7 or 10 years of the loan, and then after that time has passed, your rate and therefore monthly payment will change annually based on the interest rates at the time.
- Property tax is collected with your mortgage payment and placed in an escrow account, which automatically pays the town when payment is due.
- Property taxes are calculated based on a percentage of the value of your home, and changes with every town. They go towards supporting your town, school district, road construction, and more.
- If you choose NOT to escrow when setting up the loan, the taxes are not taken from your monthly mortgage payment, but rather you are responsible for paying them as you would any utility bill.
- Homeowner’s Insurance (also known as Hazard Insurance) insures your home and the belongings in it against damage and/or loss that may occur from theft, fire, etc.
- You are responsible for selecting and setting up your insurance policy. We often recommend that you receive multiple quotes when shopping for homeowner’s insurance. Start with the company that you receive your car insurance from to see if you can get a bundle deal. Ask your friends and family who they have their insurance from. Still not sure? We can also help recommend insurance companies.
- The first year’s insurance premium can be collected at closing to be paid to the insurance company, if the company allows it. After that, a portion of your insurance premium, much like taxes, are collected with the mortgage payment and placed in an escrow account. When the time comes to renew your policy, the payment will automatically be made to the insurance company from the escrow account.
- If you change insurance companies, make sure either you or your insurance company notifies your mortgage company so that your escrow account knows where payment should be sent.
- In addition to the PITI, you might see some additional fees with your monthly payment such as Mortgage Insurance or HOA Fees.
- Mortgage Insurance is required if you put less than 20% down payment. This will be discussed further in another post.
- HOA fees, or Homeowners’ Association fees, are only included if you purchase a Condominium, Townhouse, or other property in a planned development. The fee is often monthly or annual, and help pays for the upkeep of common areas and the building. Note: The HOA fee, while calculated into your monthly payment during the loan process, is not actually collected with your mortgage payment. You are solely responsible for paying the HOA fee to the Associations when due.
Have further questions regarding this topic? Give me a call, I’m happy to help!