After saving for a down payment and purchasing your new dream home….What comes next? A mortgage statement, of course!
If that has you scratching your head as you try to understand what your mortgage payment is actually made up of, fear not. We’ve got you covered.
In this blog, we’ll decode a typical mortgage statement, helping you understand how your dollars are being allocated.
Let’s dive in.
Your monthly mortgage payment is determined first by the size and term of your mortgage loan. Size refers to the amount of money you borrow, and the term refers to the amount of time you have to pay it back to the lender. Generally speaking, the longer your term, the lower your monthly payment will be, which is why most people choose a 30-year term on their mortgage loan.
The very first mortgage payment will be due one full month after the last day of the month in which the home was purchased. Unlike rent payments, which are typically due on the first of the month for that month, mortgage payments are paid on the first day of the month for the previous month.
As mentioned above, four items comprise a typical mortgage payment – principal, interest, taxes, and insurance. Let’s take an in-depth look at each of these.
Part of each mortgage payment is solely dedicated to the repayment of the principal balance of your mortgage loan. According to Investopedia, “Loans are structured, so the amount of principal returned to the borrower starts low and increases with each mortgage payment. The payments in the first years are applied more to interest than principal, while the payments in the final years reverse that scenario.”
Interest refers to the amount of money paid to your mortgage broker in return for loaning you money. The interest rate on a mortgage has a direct impact on your monthly payment. According to experts at Investopedia, “Higher interest rates generally reduce the amount of money you can borrow, and lower interest rates increase it.”
The government assesses Real Estate/Property Taxes, and the funds collected are utilized for schools, police departments, and firefighters. While the amount due is determined on an annual basis, the payments are divided up by the total amount of mortgage payments in a given year. The lender will collect the payments made and hold them in escrow until the taxes are due to be paid.
In addition to taxes, insurance payments are made with each mortgage payment, and the funds are held in escrow until the insurance payment is due. Two types of insurance may be included in your mortgage statement: property insurance and private mortgage insurance.
Property insurance protects the homeowner from fire, theft, and other natural disasters. Private mortgage insurance, also known as PMI, is mandatory for those with a down payment that is less than 20% of the purchase price of the home. PMI protects the lender in the event the borrower is unable to repay the loan. Private mortgage insurance payments will cease once the homeowner has reached 20% equity in the home.
While many people receive a monthly mortgage statement that includes that amount due towards the principal balance, as well as interest, taxes, and insurance, it’s important to recognize that some homeowners choose to pay taxes and insurance separately. In this case, the monthly bill received from the lender will be less, but all four items are still to be paid (even if not to the lender directly).
Where your money is going every month is not a secret! Instead, you will have access to an amortization schedule. Mortgage amortization refers specifically to how a home loan is paid down. “The debt diminishes slowly at the beginning and then rapidly toward the end. At first, most of each mortgage payment goes toward interest. In later years, most of the payment reduces debt.” (NerdWallet).
Homeowners may use an amortization calculator to determine a number of items including; how much total interest will be paid over the life of the loan, the remaining loan balance per month, as well as when to cancel private mortgage insurance.
Mortgages provide the opportunity for homeownership without the need for a large down payment. It’s essential to understand the structure of your mortgage payment, as well as how the total amount due is applied towards the principal, interest, taxes, and insurance.
If all of this still has you a bit confused, we’re here for you. At GoPrime Mortgage, Inc., our local lenders will help you every step of the way as you navigate the homebuying process.