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2 Minute Drill Components Of A Mortgage Payment
My phone rang a couple weeks back and the gentleman on the other end of my Samsung had this question for me: "Why are the properties on x-site are lower than y-site?"
After I explained how sites like Zillow and Trulia use different information to estimate their monthly payments we got into the components that actually make up a mortgage payment.
This is why it is so important to get pre-approved for a mortgage and know some of the basic loans types that may be available to you from a previous blog post.
Now let's check out what makes up your mortgage payment.
The Four Parts of a Payment:
The principal is the actual amount of money borrowed. This does not include the down payment. If you are putting 10% down on a $100,000 home, the remaining amount would be $90,000.
$100,000*10%= $10,000 down. $100,000-10,000= $90,000 on the loan.
Interest is the charge for the use of the loan. It's also tied into the interest rate that you keep shopping for, yanno? Lower interest rates help your buying power (you can afford "more home"), and conversely higher rates hurt your buying power (you afford "less home").
There are many different loan programs out there, but generally, you will see a fixed rate mortgages and adjustable rates. Be sure to know the difference between an Adjustable Rate Mortgage and a Fixed Rate Mortgage by clicking here.
Ah, the dreaded t-word. Your property taxes can be paid monthly if you decide to have your mortgage lender set up an escrow account. This is one of the components that can change year to year, and thus affect your payment.
Be on the lookout for a tax statement from your county each spring that will show you the appraised value of your home. Higher value generally equals higher taxes, which will mean a slightly higher payment.
Insurance is the other component of a mortgage payment that can be escrowed or go up and down along the life of the loan. Your lender will require that you keep property insurance on the house because if something happened and the house was destroyed, the bank wouldn't have any collateral for the loan.
If you own your home "free and clear", you aren't required to maintain home insurance.
What Is An Escrow Account
All this talk about an escrow account, but what exactly is it? An escrow account is basically a holding tank. It is a bank account held by a third party for two other entities.
During the real estate process, the title company will open an escrow account for the buyer's funds. Afterward, if you have a loan, the escrow account is used to hold the funds used for property tax and insurance.
Like I said earlier, you don't have to use an escrow account. If you don't, you'd be responsible for paying your property taxes and insurance premiums annually. Your monthly payments would be lower, but you had better be sure to have the cash available to pay your taxes and insurance. The escrow will spread that cost over 12 months.
Now that you have an understanding of what goes into a mortgage payment, you're closer to being ready to be a home owner!
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