By Justin 4 years ago

Breaking Down Your Monthly Mortgage Payment

How would you like to be served with a month’s worth of avocado toast for free when you buy a home? SoFi, a student loan lender who now dabbles into mortgages, is offering such for those taking out mortgages this July. When the avocado toast is gone, you’ll be left with the monthly mortgage payment. What goes into that monthly payment, you’d like to know. Let’s find out below.

Understanding the Monthly Mortgage Payment

The continuing cost of homeownership boils down to this acronym, PITI (read as pity).

  • P is for principal. This is the amount you borrowed for your home.
  • I is for interest rate. This is the amount charged on the amount you borrowed.
  • T is for taxes. This refers to the real estate taxes related to your home.
  • I is for insurance. This mainly refers to homeowners’ insurance and if applicable, private mortgage insurance.

Mortgage’s Principal and Interest Payment

Crunching the numbers for a mortgage can be confusing if you have to do everything from scratch. Nowadays, there are online mortgage calculators for this purpose.

Supposing this July you take out a $300,000 home loan with a fixed interest rate of 3.88% to be repaid in 30 years. Your monthly mortgage payment is $1,412.

This amount is the principal and interest components of the loan. The property taxes, the homeowners insurance premiums, and the mortgage insurance premiums, if any, are yet to be included in this amount.

Amortization on the standard 30-year fixed-rate mortgage works like this: a larger chunk of the first few years’ monthly payment goes to the interest portion of the loan. At year 15, the allocation will be reversed and you’ll see more going toward the principal of the loan until it will be paid off in the 30th year.

On the example $300K mortgage, you’ll make 360 payments in all totaling $508,165. If you are wondering where the $208,165 is coming from, that’s the total interest you have to pay.

Because the 30-year mortgage is structured to have low monthly payments, you don’t really feel the sting of the interest costs.

Property Taxes and Homeowners Insurance

Taxes are assessed annually and by local taxing authorities. These rates vary where you live and depend on the assessed value of your property in which calculations may vary with that of the appraisal.

Homeowners insurance is a policy you have to buy in connection with a home purchase. The lender requires it to protect the property from theft and fire as well as natural disasters like earthquake and floods, which may entail a separate policy.

Taxes are levied annually and homeowners insurance may be paid quarterly or annually. Lenders usually set up an escrow account, setting aside money from monthly mortgage payments toward tax assessments and homeowners insurance.

If you are getting a conventional loan and you have to borrow more than 80% of the purchase price (your down payment is thus below 20%), your lender will also require a mortgage insurance. This protects its interest on the mortgage should you default on your loan.

That constitutes your monthly mortgage payment. For questions or clarifications, get in touch with a lender today.

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