What's included in a mortgage payment?
You’re probably curious why we’ve created an entire section about mortgage payments. Well, since a mortgage payment is one of the major side affects of purchasing real estate with a home loan financing program, we thought it would be important to highlight a couple topics and related articles about mortgage payments that may impact your monthly budget.
Your mortgage payment is typically broken down into four primary components, often referred to as PITI: Principal, Interest, Taxes, and Insurance. These elements ensure that your financial obligations to both the lender and other relevant parties, such as your local government, are met. Here's the breakdown.
1. Mortgage Principal
The principal is the amount of money you borrow to purchase your home. It’s part of your monthly payment that directly reduces your loan balance. For example, if you take out a $200,000 mortgage, the principal represents the portion of each payment that chips away at that $200,000.
2. Mortgage Interest
Interest is the cost of borrowing money. This amount is calculated as a percentage of your remaining loan balance and goes to the lender as their profit for providing the loan. If you’ve opted for a fixed-rate mortgage, your interest rate will stay consistent throughout your loan term, giving you predictable payments.
3. Real Estate Taxes (Property Taxes)
Real estate taxes, also known as property taxes, are collected by your local government and used to fund community services like schools, roads, and public safety. These taxes are often included as part of your monthly mortgage payment and placed in an escrow account by your lender to ensure they are paid on time. A lot of lenders use an escrow account to collect and manage payments for real estate taxes, homeowners insurance, and PMI. This ensures these obligations are paid on time without you having to worry about separate bills. A portion of your monthly payment is deposited into this account, making it a convenient way to manage these ongoing costs.
4. Mortgage Insurance
There are two types of insurance that may be part of your monthly payment:
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Florida Homeowners Insurance: This type of insurance protects your home and belongings from damage or loss caused by fire, theft, or natural disasters. However, in Florida, the rising costs of homeowners insurance have become a significant concern due to the state's exposure to hurricanes and flooding. Many Florida homeowners are seeing higher premiums as insurance companies adjust rates to account for increased risks. Protecting your home in Florida’s unique environment is essential, and lenders require this coverage to safeguard their investment.
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Private Mortgage Insurance (PMI): If you make a down payment of less than 20% on a conventional loan, you’ll likely be required to pay PMI. This insurance protects the lender in case you default on your loan. PMI is typically included as part of your monthly mortgage payment until you reach sufficient equity in your home.
Some lenders offer so-called "piggy-back" second mortgages as an alternative to mortgage insurance. Before agreeing to one, be sure to research and compare whether the total cost will be as cheap as lenders often advertise them to be in the long run.
Why Is Insurance Part of Your Mortgage Payment?
Both homeowners insurance and private mortgage insurance (PMI) are included in your payment for a reason—they protect the lender and, in some cases, you as the homeowner. For example:
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Florida Homeowners Insurance: Your property and personal belongings from damage or loss, particularly important given the state's vulnerability to hurricanes, flooding, and other natural disasters.
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Private Mortgage Insurance: Protects the lender against the risk of you defaulting on your loan.
Including these insurances as part of your payment ensures you remain protected, and the lender has peace of mind.
How Does Your Loan Term Impact Monthly Payments?
The length of your loan term plays a significant role in determining the size of your monthly payments. Shorter loan terms, such as 15 years, typically come with higher monthly payments but lower overall interest costs. Longer loan terms, such as 30 years, spread out the payments over a longer period, reducing the monthly amount but increasing the total interest paid over the life of the loan.
When choosing a loan term, consider how much you’re comfortable paying each month and how quickly you want to pay off the loan balance.
Key Factors That Impact Your Mortgage Payment
1. Loan Amount
The payment is the amount of money you borrowed, so larger loans result in higher monthly payments.
2. Interest Rate
Your interest rate is determined by your credit score, loan type, and current market conditions. A lower rate reduces the amount you pay monthly.
3. Property Taxes and Insurance
These costs are influenced by the home’s location and value. Higher-value properties or areas with high tax rates can increase your monthly payment.
4. Loan Term
As mentioned earlier, shorter loan terms mean higher monthly payments but less interest paid overall, while longer terms spread out the payments at the cost of more interest.
Protecting Your Monthly Mortgage Payment
Your lender structures your mortgage payment to ensure all components are covered—principal, interest, taxes, and insurance (PITI). Each part works together to protect the amount of your monthly mortgage payment and ensure your financial obligations are met. By understanding these elements, you’ll have greater clarity about where your money is going and how you can better manage your budget.
Additional Mortgage Frequently Asked Questions:
Q: What Is an Impound or Escrow Account?
You’ve heard of the acronym PITI (Principal, Interest, Taxes and Insurance). The escrow account covers the T&I, and is included in the monthly payment.
Q: Are Impound Accounts Required?
Government loans, FHA and VA require an escrow to be established when a new purchase or refinance transaction is finalized.
If the LTV is low enough on certain other loan programs, an escrow waiver is allowed. However, there is typically a higher interest rate associated with a mortgage payment that doesn’t have an escrow account due to the lender taking on more risk.
Q: If I refinance my existing loan, what happens to my impound account?
The remaining reserves are generally refunded back to the homeowner.
Q: Can I set up an escrow account later?
Yes, you can request an escrow account at anytime. Keep in mind that you’ll have to deposit at least 12 month’s of hazard insurance, as well as around 6 month’s of tax payments in the escrow account to get it established.
Ready to Secure the Right Mortgage for Your Budget?
At 14 Days To Close, we specialize in making the mortgage process fast and simple. Whether you’re looking for a fixed-rate mortgage or need guidance on managing your insurance payment, we’re here to help.
Call us today at (813) 340-6223 or start your application online. Let us guide you toward a mortgage that fits your needs and budget.