What Makes Up Your Mortgage Payment?
Principle: This in the actual amount loaned to the borrower. A portion of your monthly payment is dedicated to repaying the mortgage loan back and building equity in your home. The longer you have your mortgage, the larger and larger percentage of each mortgage payment is applied to the principal.
Interest: This is the amount of money you are charged to borrower money for the house. A portion of your monthly payment is also dedicated to repaying the interest portion of the loan. Some mortgages can be interest only, in which the mortgage payment doesn’t include any principle pay down (and therefore the amount owed never goes down). It’s advisable to use a principle and interest loan to build equity.
An amortization calculator will show the borrower what portion of each payment is applied toward principle and interest.
Taxes: The real estate taxes are determined in Massachusetts by the individual town or city where you live. The taxes you pay are based on the city or town tax rate, and the amount your house is assessed at by the town. This money is used to pay for schools and other municipal expenses (police, fire, road maintenance). Generally in Mass., taxes are due quarterly, with the tax rate being re-evaluated every year. When your taxes are included with the mortgage payment, this portion of the payment can change based on whether or not your town or city decides to change the taxes.
Insurance: The homeowner is required by all mortgage lenders to obtain and maintain insurance on the property. It protects both the homeowner and lender from financial losses if the property sustains damage such as fire, flood, wind, or other natural disasters.
Mortgage Insurance: Whether it’s “P.M.I.” (Private Mortgage Insurance) for conventional loans or “M.I.P.” (Mortgage Insurance Premium) for government backed FHA, VA & USDA loans, mortgage insurance can become an expensive, but necessary add on to your mortgage payment. This mortgage insurance will allow home buyers to put less than 20% as a downpayment on a home. It will add to your monthly, so remember to ask your loan officer about the specific cost and be sure to budget accordingly.
Condominium Fees: Your mortgage lender does not include the condo or maintenance fees in with your monthly mortgage payment. This must be paid separately once you purchase the home. However, the underwriter will take these fees into consideration when determining if you are able qualify for the mortgage by including this in amount in calculation of D.T.I.
Mass Mortgage Buddy Tip:
Be sure to get current & accurate information about the taxes (from the town) and condo fees (from the seller) so you can make sure you have payments that fit within your budget.
Also, your mortgage lender (per Fannie Mae & Freddie Mac guidelines) will require that you escrow for taxes and insurance if you do not have a 20% equity position in your home.
