What exactly is a mortgage payment?
You are probably familiar with the term ‘mortgage payment’, whether or not you have even purchased a home. While most understand the overall meaning of a mortgage, do you know how mortgage payments are determined?
In most cases your mortgage payment will include a combination of principle, interest, taxes and insurance — also known as PITI. Let's discuss the individual components of a mortgage payment.
Principle
The principle is the actual amount of money you borrow. This amount usually reflects the purchase price of the home minus any down payment that was made. This is the component of your monthly payment that goes towards paying back your loan.
Interest
Interest is what you pay for borrowing money, strictly owed based upon using money that is not your own.
Often a lender will quote you an interest rate when you apply for a loan, locking in that rate for a certain amount of time. Make sure that your locked rate period is long enough to get you through closing, otherwise you will have to request an extension (which isn’t always possible). By locking in your rate, it ensures that you will not pay more if rates rise.
Keep in mind when you are looking to lock in a rate for an extended period of time, if rates fall during this time you will still be paying your locked rate even if it is higher.
Taxes
Property tax is based on the county that the home is located within. While considered an annual tax, you may be required to pay towards the total tax amount on a monthly basis. Typically these payments are held by the lender who then makes the payment on your behalf when it's due. This process ensures that taxes are paid correctly and on time, making sure the loan does not go into default.
Insurance
Insurance paid through your mortgage usually combines Homeowners Insurance and mortgage insurance (if necessary). Whether or not mortgage insurance is included will depend on your type of loan and how much money you put down on the down payment.
Understanding a mortgage payment and what is involved is a very important aspect of the home buying process. It will be necessary for you to understand what you can afford and how this will affect your mortgage. If you need help calculating these numbers, the True Affordability Tool can help — it will break down your budget and show what you can comfortably afford.
