The Mortgage Payment
Your monthly mortgage payment consists of:
Principal: The actual amount you are borrowing
Interest: What it costs to borrow the money for your home
Escrow: A third party account used to pay for taxes and insurance on your behalf (more on that next)
Understanding Escrow
Each month, your lender will collect money from you (in your monthly mortgage payment) and put that money into an escrow account to pay your property taxes and insurance on your behalf. This not only protects the lender’s investment but also makes it easier for you to pay these expenses, rather than having to plan for hefty tax bills or insurance premiums on your own.
Your escrow payments include the following:
Real Estate Taxes: A percentage of your home’s assessed value that gets paid to your local government to fund roads, schools, and other local services.*
Homeowners Insurance: Protects you financially in the event of damage to your home. Typically excludes floods and earthquakes. A separate flood insurance policy may be required, if applicable.
Mortgage Insurance (if applicable): If you put down less than 20% when you buy your home, you’ll have to pay mortgage insurance. Let’s take a closer look at how mortgage insurance works next.
What Is Mortgage Insurance?
Mortgage Insurance (MI) protects the lender in the event that you fall behind on your mortgage payments. If you put down less than 20% when you buy your home, you’ll have to pay MI (also referred to as private mortgage insurance [PMI] or a mortgage insurance premium [MIP], depending on the type of loan product you choose). Some loan programs, like VA loans, don’t require MI, no matter how big or small your down payment.
How Mortgage Insurance Can Benefit You
While MI places an added expense on your monthly mortgage payment, it can be worth it by helping you purchase a home sooner. For example, let’s say you only have 5% saved up for a down payment. Rather than waiting to save up for a full 20% down payment, which could take years, you could purchase a home now with your 5% down payment and pay MI as a tradeoff.
Once you have enough equity built up, you may be able to cancel your MI. That’s because as you build equity, your LTV decreases.
Talk to your loan officer to learn more about how MI works.
Down Payment
While your down payment is not a part of your mortgage payment, it does play a part in what your monthly payment will be.
Your down payment is part of the cash you bring to closing. The required down payment amount varies based on your loan type. For example, an FHA loan only requires 3.5% down, but some programs require up to 20% down. You are always allowed to put more down if you want to reduce your monthly payments. Some programs allow gift funds to be used toward the down payment, which is very helpful for borrowers short on cash. Mortgage insurance is required when a down payment is less than 20%.
*This amount is estimated by your lender, so keep in mind that you may get a refund or have to pay a balance at the end of the year.
