Mortgage Payment Breakdown
After most people buy a house, they simply just start paying their mortgage. They don’t necessarily know exactly what they are paying or the mortgage payment breakdown, they just know they have to pay that amount. However, your mortgage payment isn’t just for your mortgage loan. It also includes your property taxes, homeowners insurance and mortgage insurance (if applicable).
First, let’s go over everything that is included in a mortgage payment:
Principal mortgage – this is the amount you borrowed to buy the house. This is the amount you financed.
Interest payment – this is the amount the bank charges to loan you the money. This can vary greatly depending on the interest rate you lock in when you buy a house.
Mortgage Insurance – if you didn’t put down 20% when you buy your house, you will pay mortgage insurance. This insurance basically covers the lender should you default on the loan. However, this is where you need to understand the difference between loan programs. Conventional loans will drop the mortgage insurance when you have 20% equity in a house. FHA loans have mortgage insurance for the life of the loan, no matter how much equity you have in the house.
Property Taxes – You will take your property taxes for the house and divide them by 12, this is the amount that will be due each month for your property taxes. Property taxes can vary greatly depending on the area. A house in Webster Groves might have double the taxes for a similar house in the city. Having the higher taxes can affect how much house you can buy. The higher the taxes the more they will eat into the total mortgage payment that you qualify for.
Homeowners Insurance – Same as your property taxes, you take your premium insurance amount and divide it by 12. This is the amount your will owe each month for your homeowners insurance. Homeowners insurance can vary depending on several factors, one of which is your credit score. The insurance can also depend on the area.
Association Fees – If you buy a condo, villa or something of the sort, then there are typically monthly association fees. Association fees will vary depending on the building and amenities offered. The amount of the association fees can affect how much you qualify for, so make sure you understand the process of buying a condo. Association Fees ARE NOT part of your mortgage payment, however, lenders to take this into consideration when they qualify you for a loan. Association fees are added into the equation as if there were part of your mortgage payment. The difference is that you are paying the association directly every month for this fee.
Now, let’s discuss your mortgage payment breakdown and where the money goes. The biggest portion(usually) of your mortgage is your Principal & Interest, this part of your payment never changes for the life of the loan.
The second part of your payment is your escrow payment, which includes your homeowners insurance, property taxes and mortgage insurance (if applicable). This portion of your payment is collected each month and held in an escrow account and when those bills are due a payment is made for you. Your mortgage servicer company will pay the insurance company or city tax department directly for these bills. You never know it’s happening! The escrow payment is the part of a mortgage payment that will cause it to increase over time. As your property taxes go up and/or homeowners insurance, so does your mortgage payment.
One of the biggest questions about escrow accounts has to do with the required minimum balance. When you close on your house, part of your closing costs included a ‘cushion’ for your escrow account. By law your mortgager can not hold more than 2 months of escrow payments as a cushion. The extra is there for unexpected increases in your taxes and/or insurance. Normally the mortgage company will be notified of the increase or decrease.
When an increase happens you will be notified of this increase and have an two options. You can either make what they call an ‘escrow payment’ to cover the increase or you can choose to have your monthly mortgage payments increased to cover the ‘escrow shortage’, which essentially covers the increase. They will tell you what the new payment will be, which is normally a nominal increase. The choice is yours and it’s up to you what you want to do. I personally like to make the escrow payment when there is an increase so that my mortgage payment can stay the same. However, you may be just fine with your mortgage payment increasing.
If for some reason your taxes or your insurance go down, then it is possible that you may receive an escrow refund check in the mail. Again, by law the mortgagor can not hold more than 2 months worth of escrow payments in an account. So if for some fabulous reason your escrow payments went down, when they do a review, they will refund any escrow overage. I assure you this does not happen often. I did have this happen once when I switched insurance companies. My homeowners insurance decreased by several hundred dollars, so when a review was done I ended up with an overage and a refund was made. I don’t really plan on this ever happening again, but it was sure nice when it did! It could also happen when you no longer have to pay mortgage insurance. And just like when you have an increase in escrow payments, when there is a decrease in escrow payments your payment goes down as well. (That always super nice!)
If you have any real estate questions, please let me know! I’d love to answer them.
Send your questions to: Shannon@LivingTowerGrove.com