Do you know how much your monthly mortgage payment is? If you are like most homeowners, you typically give a check blindly every month without even realizing where your money is heading. In reality, a significant percentage of homeowners do not know their exact interest rate or what they actually owe on their loan balance. They spend weeks before closing trying to get the best possible loan terms, just to quickly forget about everything once they get home. If you’re an investor or a homeowner, you should have a good idea of what your mortgage payment is. Such statistics have an effect on the balance of the monthly spending or cash flow. If you’ve never knew these things, or need a refresher course, here’s a mortgage payment overview.
Mortgage Payment Breakdown: Parts of a Mortgage Loan
The mortgage payment consists of four sections: principal, interest, taxes and insurance. The principal is the repayment of the debt amount, which normally adds to interest, or the income that goes to the lender, while taxes reflect the part that goes to the government, and insurance is what covers the lender in the event that the loan defaults.
If you’ve ever made mortgage payments before, have you ever stopped to think exactly what the mortgage breakdown looks like? Or were you thinking you were chipping away at a lump sum? As it turns out, a mortgage payment anatomy is a lot more complex than that. For example, if you make less than 20% of your down payment, then your mortgage loan breakdown most likely requires private mortgage insurance (PMI) as well, which will be addressed later on. Keep reading to learn more about the role each of these components plays in the breakdown of mortgage payments:
- Principal: The principal is the sum of the repayment of the loan. That is the portion of the bill that is used to reduce the balance you owe. It may be clear to some, but the greater the balance, the bigger the mortgage payment. If you take the option of a fixed interest rate, your principal repayment will be the same for the life of your loan. There is a lot of details about your recovery from your amortization plan. This is a description of any payment for whatever term you want. Usually, a larger amount of interest is paid during the back portion of the loan. The first seven years of a thirty-year loan will mostly go towards interest. Your lender needs to get their money back first before they consider reducing the principal. This is the method that banks use to protect themselves in the event of default. The next time you get a minute, go to the website of your lenders and print a copy of your amortization schedule. You might be shocked about where your monthly payment is headed.
- Interest: Interest is simply the income that goes to the investor. As described above, the lenders will still collect their interest in the first few years of repayment of the loan. Many borrowers are concerned with the interest rate that they are qualified for on their loan. The bigger the amount of the loan, the higher the increase in the rate of the monthly charge. The disparity between 4 percent and 4.25 percent on a $100,000 loan is only equal to a change of less than $20 a month. On a $400,000 bond, the same shift will be heading all the way to about $60 a month. The most significant aspect of the interest is that it has been compounded. Complete interest is important, regardless of the interest rate. The principal and interest portions are usually packaged together on the monthly statement. Assuming you’ve taken a fixed rate, this number will never change during the life of your loan.
- Taxes: Taxes are the most important component of the mortgage payments. This is always the field most neglected, but it is the most critical one. Almost all lenders require you to include or pay taxes in your monthly payment. The reason they do this is because real estate taxes take precedence over everything else. If your taxes weren’t escrowed and you defaulted on your tax bill, the town could initiate a cycle of foreclosure. The tax part of the payment can vary from year to year depending on the city. If you are escrowed, you’ll put the next tax payment or two with your landlord, and they’ll pay the taxes for you. The chances are that you will never see a tax bill again. If you have an additional fee in your escrow account at the end of the year, your lender may be willing to deduct your payment. For most cases, they’re just going to move things to next year. If your mortgage payment has increased and you don’t know why, look at the tax portion.
- Insurance: As is the case with your property taxes, insurance is typically counted in on your monthly payment. Lenders are doing so to ensure that you are still safe in the case of an emergency. From time to time, the insurance provider can test the state of the roof or the rate can increase. Insurances and taxes usually do not see any fluctuation, although if there is a run on foreclosures or if the region has been hit by natural disasters, that could change dramatically in just a couple of months.
Mortgage is extremely difficult to comprehend, regardless of whether you are a recent or experienced homeowner. Not all of us can be genius with financial terms, but as customers, it is still necessary to grasp just how mortgage loans work. Here you’ll find rundowns for some of the more popular mortgage breakdown problems.
Your First Mortgage Payment
Homeowners do not make their first mortgage payment until one full month after the house has been sold. Mortgage installments are normally received at the beginning of the month for the preceding month (unlike the tax charged for the same month). For eg, if you close your home on April 22, your first mortgage payment may not be due until June 1 which will cover your home for May. Then, on July 1st, you’ll make the second payment for June and so on. Details on the first payment sum and the due date will be given to you at the time of your closing date.
Loan Amortization Calculator
A home loan is amortized over time, which ensures that the home balance is slowly lowered over the duration of the loan, taking into account interest. It ensures that each of your monthly debt contributions are made up of a contribution to your interest and a contribution to your principal balance. Some homeowners are shocked to hear that, at the outset of the lease, payments are primarily made to interest. CreditKarma provides an electronic credit amortization calculator that displays the distribution of mortgagee payments over the duration of the loan.
Amortization schedule can provide a breakdown of payment for your mortgage, which means that it will show the portion of your payments that goes to each of the four credit components mentioned above. This schedule is important for tracking how much of the principal loan you actually paid off and how much interest you paid for. For examples, if you have a $200,000 30-year mortgage, your amortization plan would have 360 payments. Your contributions will be allocated individually over this period, because you pay down various portions of the loan. The first payment you make is likely to go to interest, although payments at the end of the loan term will go almost exclusively to the fulfillment of the principal payments.
If you’re like most homebuyers, you’ve bought the house by putting less than 20% down. In this case, you make a premium that is included in your monthly mortgage for monthly private mortgage insurance (PMI). This capital is deemed to be mortgage default protection by the lender. In the case of traditional loans, you have to make this payment until you have 20% equity in your house. Recent adjustments have been made to the FHA systems that hold this PMI charge for the whole duration of the loan. With interest rates at historically low levels, it is crucial to know the length of PMI payments before you agree to a loan. With prices set to increase, the adjustment will be too high to make it worth removing the PMI component of your mortgage.
HOA & Other Fees
Homebuyers are frequently surprised at the amount of payments that can follow mortgages when buying for the first time, with costs such as as private mortgage insurance (discussed above) or other forms of charges. Other examples may include homeowner association dues, condo association fees, or different forms of location-based insurance plans. You may not be able to prevent any extra costs, but you will be able to compensate for them while shopping for a property and be sure there are no complications while you are making your first mortgage payment.
When you search for land, be aware of places that have associations with homeowners. Such fees will vary from $50 to $300 a month based on the location and facilities offered. Most homeowners feel that such payments are worth it, because they also come with other advantages to the community. Nonetheless, no one should be shocked at extra costs, particularly when buying a house. When closing on a home, make sure to review any and all forms of charges and do not presume that your mortgage will be the sole responsibility.
Paying Off The Mortgage
Homeowners sometimes ask if they are able to pay off their mortgage earlier than the initial loan period by making extra contributions per month. This is entirely understandable, because the notion of possessing a free and simple property poses itself as a powerful motivation. The answer is “yes”, but be sure to double-check your mortgage documents as well as check in with your lender to find out about possible early payment penalties. Lenders have an opportunity to keep the mortgage open for as long as possible, to benefit from interest payments. Despite of that, they also impose fees if you spend more than a certain amount of your loan balance per year.
How Do I Pay A 30 Year Mortgage In 15 Years?
The easiest way to settle a 30-year mortgage in 15 years is either to settle greater sums at once or to push up the frequency of the payments. When you find yourself with additional monthly cash money, whether from a raise at work or from renting a spare bedroom, you might be able to raise your daily payment. Just make sure to contact the lender to ensure that the excess money goes straight to the principal.
Another way to pay off your mortgage more efficiently is to increase the length of times you pay. For instance, many homeowners pay one mortgage a month. However, if you get paid on a biweekly basis, you might set up a loan payment to be billed automatically on the payday. That will amount to 13 full contributions over the course of a year, compared to 12. These approaches will not only help you with increasing your home equity, but they will also bring you closer to completing your final mortgage payment.
Estimating Your Mortgage Payment
Estimating your monthly mortgage payment would include details on your loan and some math. The calculation should look like this:
P [ i (1 + i)n ] / [ (1 + i)n – 1] = Monthly Mortgage Payment
To determine your charge, first take your annual interest rate and divide it by 12. This will give you the monthly interest rate that you can apply to the i component. Then take the duration of the mortgage (in years) and multiply by 12. This will give you the cumulative number of mortgage payments you intend to use as “n.” The “P” variable is the amount to be due on the loan.
Let’s presume you borrow $250,000 with a 30-year mortgage of 3.5 percent. Following the steps, the monthly interest rate will be roughly 0.029%; and the cumulative amount of installments will be 360. The completed calculation would be as follows:
$250,000 [ .0029 (1+.0029)360 ] / [ (1+.0029)360 – 1] = $727.01
Based on the calculation, the average interest payment will be around $727.
How Much Of A Mortgage Goes To Principal?
The percentage of the debt goes to the principal depends on how long you’ve been servicing the loan. Although the monthly contribution can be the same every month, various amounts are generally assigned to different sections of the loan. In most situations, lenders can find that most early deposits go into paying back the interest of the loan. That is to make sure they get paid up front. AS the loan period progresses and the interest is being paid out, most of the monthly contribution would go straight to the principal. The explanation for that is because the amortization of the loan, which basically slows down the payment plan. There are some free amortization calculators that will inform you just how much of the payout is going to the principal. I suggest that you use the calculator given by Bankrate.
Should I Pay Off My Mortgage Early?
There are a variety of benefits and disadvantages involved with early interest payments. Most importantly, making the last mortgage payment comes with a feeling of pride. It marks the end of being in debt for many homeowners, which can provide peace of mind. Depending on your debt, paying off your mortgage early will even bring substantial relief from interest payments. Homeowners will also use the extra cash per month to pay for maintenance expenses, or even an investment.
On the other hand, paying off a mortgage early could place a financial burden on some homeowners. If you agree to raise your mortgage payments, make sure you have an emergency savings plan. Spending all of your extra cash on additional mortgage payments could place you in a tight spot if something unexpected happened. It is also a good idea to ensure that you pay off other high interest debts before coping with a mortgage. If credit cards or a car loan cost you more than a month of interest, it might be wise to deal with those first.
What’s Homestead Exemption?
Homestead exemption is a tax policy offered in 46 states that allows homeowners to exclude a certain percentage of their home value from their annual property taxes. These deductions are a way for states to partially minimize property taxes, which are governed at local level. The payment may be either a percentage of the value of the property or a fixed amount determined by legislature. A percentage allows homeowners to save the same proportion of taxes, but generally benefits those with higher value homes. A flat rate is considered to be more favorable to homeowners with lower property values. In order to qualify, the property must be a primary residence for homeowners, not a rental property.
Whether you’re buying a house for the first time or simply using traditional financing to invest, it’s crucial to understand how mortgages work. Start by reviewing the mortgage loan components, and then see what questions you still have. Familiarizing yourself with these principles will help you find places where you can save money. The more you know about your mortgage payment breakdown, the smarter decisions you’ll be able to make.