Understanding The Three Components of Your Mortgage Payment

There’s more to your mortgage payment than just what you owe the bank. Your mortgage payment consists of multiple components: loan repayment to the bank, mortgage interest, and escrow.

How much of your monthly payment goes to interest, taxes, and monthly mortgage payments? We’ll dive in and break down the three parts of your mortgage payment in this post.

 

THE PRINCIPAL ON YOUR MORTGAGE:

The principle is the loaned to you by your mortgage lender to purchase your home. The principal component of your loan payment is the most straightforward.

 

THE INTEREST ON YOUR MORTGAGE PAYMENT:

The cost of borrowing money is an interest rate, or what the bank charges you in exchange for lending you money. Several factors influence interest rates, including the type of loan, the location of the home, the down payment, the credit score, and so on.

 

THE ESCROW ACCOUNT:

In most cases, your escrow account is composed of a combination of your property tax, homeowner’s insurance, and perhaps even private mortgage insurance (PMI).

Your monthly taxes are collected through your escrow account and then deposited into a single account at the end of the year. Your lender will finish the payment in most cases, ensuring that you experience a smooth transaction as the borrower.

After year-end reconciliation, your loan may require modifications to your escrow and mortgage payment.

 

THE BOTTOM LINE:

To determine how much house you can afford, keep in mind that each component will affect your monthly payment amount because a mortgage payment consists of much more than just the sum borrowed.

With that said, when calculating how much house you can afford, it’s usually a good idea to meet with a mortgage consultant in person to go over your options.

Before obtaining your mortgage, you should get a document called the “Principle of Lending.” It not only protects you from getting caught by surprises but can also help you manage your finances better!

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