If you know much of anything about mortgages, you know that as you pay for your loan, you don’t just pay for your house. So what all goes into a mortgage payment? How is it calculated? And, most importantly, what ways can I change my payments and schedules to make sure I save the most money possible on the other stuff?
Homes, like cars, boats, and some luxury items, most people do not pay for with cash anymore. It is very rare that someone has $500,000 laying around so they can purchase a new home, but it is not unheard of. But for the most part, if you have a home, you have a home loan, and if you have a home loan, you have monthly mortgage payments.
A loan is only called a mortgage when you are using the loan to purchase a home. A mortgage payment has a few things built in that other loan payments do not have. When you send a check to your lender every month for your home, you are paying part principal, part interest, part taxes, and part insurance.
The principal is the original cost of the home. The percentage of your monthly payment that actually goes toward paying the principal varies greatly depending on length of the loan, the percentage of the home you took a loan out on, and the number of times per month you pay for a loan.
The interest is the extra you pay on your loan. It is the cost of taking out a loan, and how loaners make their money. Interest rates on home loans vary depending on a number of factors, including the credit score of the buyers, the percentage of the home the buyer took out a loan on (for example, the interest rate would be lower if you took out a loan on 80% of the home, versus 85%), and the national average mortgage loan interest rates, which are based loosely on the rates of ten-year treasury bond interest rates.
The taxes part of your mortgage payment include both the federal and state taxes associated with purchasing a home. If you paid cash for a home, you would have to pay these taxes all at once, but since you have taken out a loan, you can distribute the taxes over your monthly payments. The taxes included in purchasing a home are sales tax (which varies by state) and real estate taxes.
The last part of a mortgage payment is the insurance. Property insurance helps to protect a buyer from the ravaging effects of fire, theft, and even some natural disasters. There is also a second insurance cost, which protects the lender from losing all of their investment if the buyer is unable to pay the loan. This helps the investor or loaner to know that their investment in you and your home purchase is sound, in case of foreclosure.
The components of the mortgage payment are very simple, and knowing what you are paying for can help you to make better decisions when choosing your mortgage options. Check to see how much of your payment is applied to principal; if your loan payment seems to be mostly insurance, taxes and interest, you may want to think about paying more than your minimum payment, or even switching your monthly loan to a bi-weekly loan. The more you pay on your principal every month, the more money you will save on the other pieces of your mortgage puzzle.
By Martin Fisher