What Makes Up a Mortgage Payment?
Online mortgage calculators can give borrowers a sense of what their monthly mortgage principal and interest payments will be based on the amount they're borrowing and the interest rate. The mistake that many borrowers make, when using these tools, is forgetting that principal and interest are not the only things that make up a mortgage payment.
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Principal
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The principal portion of your mortgage payment is the amount of money you owe on your home amortized over your mortgage term, generally 15 or 30 years. At the beginning of your loan term, you will pay a much higher percentage towards interest than towards principal, but the closer you get to paying your mortgage off, the more you will pay towards principal than interest. Any extra money paid on your monthly mortgage payment is applied towards the principal portion of your loan.
Interest
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Interest is the amount of money paid to the lender in exchange for the loan to purchase your home. If you have a fixed interest rate mortgage, the amount you pay towards principal and interest will be the same for every payment you make; the only fluctuation will be in the allocation of the payment towards principal and interest. On the other hand, fluctuations in interest payments are an inherent part of a mortgage with an adjustable interest rate.
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Homeowners' Insurance
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Most lenders require borrowers to keep homeowners' insurance for the life of the mortgage. As such, your mortgage payment may include your annual homeowners' insurance premium. In this case, the annual homeowners' insurance premium is divided by 12; that amount is then added to the mortgage payment. The monthly payments go into an escrow account from which your homeowners' insurance premium is paid when due. This amount is recalculated annually based on fluctuations in insurance premiums.
Private Mortgage Insurance
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If you are borrowing more than 80 percent of your home's value, your lender will require you to purchase private mortgage insurance (PMI). PMI protects the lender in the event that you default on your loan. While your lender will be happy to establish a PMI policy for you, it is usually wise to shop around on your own to ensure you're getting the best rate possible. A borrower can cancel his PMI policy once he's paid the principal amount down to less than 80 percent of the home's value.
Property Taxes
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Property taxes are annual taxes that are charged based on the value of your home and land and assessed by the local government. Generally, property taxes are included in mortgage payments. The annual property tax for your property is divided by 12 and added to your monthly mortgage payment. Those payments go into an escrow account from which your property taxes are paid when due. The amount you pay towards property taxes is recalculated annually based on fluctuations in tax rates and the home's assessed value.
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References
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