2. Interest accrued on your principal
The interest portion of a monthly payment is the amount a lender charges for making the loan that was used to purchase your home. Initially, the largest part of your mortgage payment each month will be dedicated to paying interest due. However, as time passes, more of your monthly payment will go towards paying down the principal.
3. Your property taxes (escrow)
Real estate taxes on your home are due every year. Many times lenders collect these taxes from the homeowner throughout the year (1/12th of the annual bill each month), which is called an escrow. These escrowed amounts are often included in your monthly mortgage payments, as well and then paid out to the taxing authorities once a year by your lender. Real estate taxes help to pay for municipal services, such as public schools and road maintenance. Keep in mind, tax rates can vary significantly from area to area and can often be quite costly. Therefore, it’s important you find and determine your exact local tax rate prior to closing on a home.
Some people self-escrow but that takes the discipline to put aside 1/12th of your tax bill every month. The advantage of self-escrowing is that you can earn interest on the money you set aside each month to pay your insurance and tax bills. Either way, the whole point of an escrow is to pay your taxes and insurance on time; having an escrow inclusion in your monthly mortgage payment can remove additional management burdens for the homeowner.
4. Your homeowner's insurance
Homeowner’s insurance will also be included in your monthly mortgage payment. Remember, homeowner’s insurance provides you, the buyer, with protection in the event of an unforeseen natural disaster or unplanned event.
If you are unable to put down 20% of the purchase price at closing, you may also be responsible for paying private mortgage insurance (PMI). This type of insurance may be required by the lender as it protects the lender in case you are unable to repay the loan amount and/ or default on the mortgage.
Keep in mind, however, the cost of PMI can vary based on several factors, including but not limited to:
- loan amount
- loan-to-value ratio
- property type
- credit score
As a result, it is important that you discuss a lender’s practices and fees regarding PMI.
It pays to determine your future monthly mortgage payment before getting to deep in the process of finding that perfect home. By calculating the principal, interest, taxes, and insurance costs, you may be able to better judge just how much owning that dream home will actually cost. So, before you sign any settlement papers, make sure to do some upfront research and speak with your lender, real estate agent, and local tax authorities about current homeownership expenses.