A mortgage is a long-term loan you acquire in order to purchase your new home. This loan allows you to make the purchase without paying cash upfront under the agreement that you will pay the money back in the form of monthly payments over the course of several years. But, do you know exactly what your monthly payments are really paying for?
Your mortgage can be broken down into four basic elements. Principal, interest, taxes, and insurance. This is commonly described as PITI.
1. Principal
The principal of your mortgage payment is the amount you owe before adding interest. For example, if your house was $100,000, your overall principal payment would be $100,000.
2. Interest
Interest is the fee you pay for borrowing money (taking out a loan) for your house. This amount is based on your agreed-upon interest rate with your lender before closing on your new home. At first, your interest may seem really high. This is because your mortgage payments will first cover interest instead of principal. However, as your principal decreases, so does your interest, because you’re only required to pay interest on the unpaid amount of your principal payment.
3. Taxes
Taxes are often one of the most overlooked costs of homeownership. When purchasing a new home, one of the taxes you’ll be required to pay is property tax. This tax generally varies by location but goes towards improving and supporting your local community. Your lender will charge you the annual tax payment divided by 12 and pay your property tax at the end of the year. Keep in mind that because property taxes can go up, so can this element of your mortgage payment.
4. Insurance
Homeowners insurance covers your property in the case of a fire, storm, or break-in. Depending on the location of your home, you may also be covered for additional circumstances like earthquakes and floods.
Being educated about your mortgage is just one step towards being prepared for homeownership. Highcrest Home Lending offers the most competitive loan products and top-notch educational resources to our clients. Whether you’re a first-time home buyer or looking to refinance your existing mortgage, we’re here to make the process as smooth and simple as possible.