Monthly Mortgage Payment Breakdown

Monthly Mortgage Payment Breakdown

GTG Financial, Inc
GTG Financial, Inc
Published on August 25, 2021

Monthly Mortgage Payment Breakdown

A mortgage is a long-term loan designed to help you buy a house. In addition to repaying the principal, you also have to make interest payments to the lender. The home and land around it serve as collateral. But if you are looking to own a home, you need to know more than these generalities. This concept also applies to business, especially concerning fixed costs and shutdown points.

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  • Mortgage payments are made up of your principal and interest payments.
  • If you make a down payment of less than 20%, you will be required to take out private mortgage insurance, which increases your monthly payment.
  • Some payments also include real estate or property taxes.
  • A borrower pays more interest in the early part of the mortgage, while the latter part of the loan favors the principal balance.

 Understanding The Mortgage Payment Structure

The main factors determining your monthly mortgage payments are the size and term of the loan. Size is the amount of money you borrow and the term is the length of time you have to pay it back. Generally, the longer your term, the lower your monthly payment. That's why 30-year mortgages are the most popular. Once you know the size of the loan you need for your new home, we can help you compare mortgage types and payment breakdowns

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There are four factors that play a role in the calculation of a mortgage payment: principal, interest, taxes, and insurance (PITI). As we look at them, we'll use a $100,000 mortgage as an example.

 Principal

A portion of each mortgage payment is dedicated to repayment of the principal balance. Loans are structured so the amount of principal returned to the borrower starts out low and increases with each mortgage payment. The payments in the first years are applied more to interest than principal, while the payments in the final years reverse that scenario.4 For our $100,000 mortgage, the principal is $100,000.

 Interest

Interest is the lender's reward for taking a risk and loaning you money. The interest rate on a mortgage has a direct impact on the size of a mortgage payment: Higher interest rates mean higher mortgage payments.

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 Higher interest rates generally reduce the amount of money you can borrow, and lower interest rates increase it.
Taxes

Real estate or property taxes are assessed by government agencies and used to fund public services such as schools, police forces, and fire departments. Taxes are calculated by the government on a per-year basis, but you can pay these taxes as part of your monthly payments. The amount due is divided by the total number of monthly mortgage payments in a given year. The lender collects the payments and holds them in escrow until the taxes have to be paid.6

 Insurance

Like real-estate taxes, insurance payments are made with each mortgage payment, and can be collected and held in escrow until the bill is due. There are comparisons made in this process to level premium insurance. There are two types of insurance coverage that may be included in a mortgage payment. One is property insurance, which protects the home and its contents from fire, theft, and other disasters. The other is PMI, which is mandatory for people who buy a home with a down payment of less than 20% of the cost. This type of insurance protects the lender in the event the borrower is unable to repay the loan.

 Mortgage insurance may be canceled once the balance reaches 78% of the original value.

While principal, interest, taxes, and insurance make up the typical mortgage, some people opt for mortgages that do not include taxes or insurance as part of the monthly payment. With this type of loan, you have a lower monthly payment, but you must pay the taxes and insurance on your own.

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When Mortgage Payments Start

The first mortgage payment is due one full month after the last day of the month in which the home purchase closed. Unlike rent, due on the first day of the month for that month, mortgage payments are paid in arrears, on the first day of the month but for the previous month.

 Say a closing occurs on January 25. The closing costs will include the accrued interest until the end of January. The first full mortgage payment, which is for the month of February, is then due March 1.

 A mortgage is an important tool for buying a house, allowing you to become a homeowner without making a large down payment. However, when you take on a mortgage, it's important to understand the structure of your payments, which cover not only the principal (the amount you borrowed) but also interest, taxes, and insurance. It tells you how long it will take you to pay off your mortgage and, ultimately, how expensive it will be to finance your home purchase.

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GTG Financial, Inc
GTG Financial, Inc
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(707) 546-0440

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