How a Mortgage Payment Breaks Down
A mortgage payment does not typically pay off your home loan interest and principal exclusively. Homeowners notice that mortgage payments increase or decrease from year to year. These changes result from changes in important components like insurance premiums and property taxes.
Other People Are Reading
-
Interest
-
The interest rate is the cost of borrowing to purchase your home and largely determines how much your mortgage payment is. For lenders, interest represents the profit generated from lending you the money to buy your home. Every mortgage payment goes toward paying interest to the lender. According to the Federal Reserve Board, the repayment schedule for a typical 30--year loan shows that most of the mortgage payment during the early years of repayment goes toward interest.
Principal
-
The principal is the amount of money you borrow to finance the purchase of your home. The principal works with the interest rate to determine the long-term cost of home ownership. A larger principal increases long-term costs while a smaller principal has the opposite effect. The principal is repaid with each mortgage payment. The repayment schedule for a 30-year loan shows that a larger proportion of each mortgage payment goes toward paying down the principal as each month passes. The proportion that goes to paying principal accelerates in the later years of the repayment schedule.
-
Homeowner's Insurance
-
Homeowner's insurance, also called hazard insurance, protects homeowners from damage to the home from natural disasters, bad weather or vandalism. Lenders commonly require homeowner's insurance at the time the mortgage closes and thereafter. This protects the investment that both the homeowner and lender make in the mortgage in case the home is damaged or destroyed. According to 2008 estimates from the Federal Reserve Board, homeowner's insurance adds about $25 to $80 per month to the mortgage payment.
Private Mortgage Insurance
-
Private mortgage insurance (PMI) is required for home buyers who make a down payment under 20 percent of the amount of the purchase price. PMI protects lenders from financial losses that may occur if the homeowner stops making mortgage payments. You have the option to cancel your PMI once you have 20 percent in home equity. As of 2008, PMI charges added approximately $50 to $100 to the mortgage payment every month.
Property Taxes
-
The impact of property taxes on your monthly mortgage payment varies by county. Property taxes are assessed every year and oftentimes included in your monthly mortgage payment. Most homeowners pay property taxes through an escrow account, for which your lender collects money every month as part of your mortgage payment.
-
