What Makes Up A Mortgage Payment?
Buying a home can be one of the most rewarding investments you will ever make. However, it can also be one of the most costly. Estimating your monthly mortgage payment well in advance of purchasing can help you make smart decisions with your budget and knowing what you can and can’t afford.
Your monthly mortgage payment is made up of several components. This housing expense is commonly referred to as a “PITI” or principal, interest, taxes, and insurance.
Principal
The principal is the amount you actually borrowed from the lender which excludes interest. When you first start making mortgage payments, a majority of your payment will go towards paying the interest. However, the amount of principal you pay off will increase each month. This puts you one step closer to owning the home. In the final years of a loan, you will primarily be paying down the principal.
For example, if you are purchasing a home that costs $100,000, and you are putting down 10%, or $10,000, then the principal is $90,000. If you are not putting any money down and are financing the entire purchase, then the principal is $100,000.
Interest
The interest is what the lender charges for loaning you the money. The higher the interest rate on a mortgage, the higher the monthly payments will be. Since interest rates are a major component of affording a home, homebuyers are typically able to borrow more when there is a low-interest rate.
Using the same hypothetical loan calculation as above, the total interest on a $100,000 30-year mortgage at 5% interest rate is $93,255. It drops to $83,930 with the $10,000 down payment.
Taxes
A portion of your mortgage payment will go toward real estate or property taxes and is paid to your local government. What you pay depends on multiple factors including your city’s or town’s tax rate and the property itself.
If the property tax rate on the home in our example is 2% and the assessed value also happens to be $100,000, then the annual taxes due would be $2,000, adding $166 to your monthly payment.
Insurance
The insurance portion of your mortgage payment covers both homeowners insurance and private mortgage insurance, if applicable. Homeowners insurance protects your home and property in the event of theft or damage. Depending on the property and where you live, you may need to take out additional protection such as flood insurance. If you are putting less than a 20% down payment on your home, then you will also be required to carry private mortgage insurance (PMI), which is insurance that protects the lender in the event you default on your loan. It is a percentage of the loan amount charged annually and divided among the monthly payments.
As you are shopping for a home, it’s important to estimate your payments to compare the affordability of different properties you are considering. At First Ohio Home Finance, our mortgage payment calculator will help you figure out your total payment. Our loan officers will help you find out an accurate interest rate, tax rate, and your monthly PMI if applicable.
If you’re in the market for buying a home, contact a loan officer at First Ohio Home Finance and we can help you figure out exactly how much you can afford.
