What Is Included in a Mortgage Payment?

Mortgage payments are the payments you make toward your loan used to purchase your home. But when you make a payment, the money doesn’t just go toward paying off the amount you borrowed. It’s important to know ahead of time how your payment is structured. This could make a difference in the type of loan you decide to apply for. 

What Is a Mortgage?

 First, let’s cover the basics. Is there a difference between a home loan and a mortgage loan? Yes, there is. A home loan is a loan specifically for purchasing a home. You apply to a lender, and they use the home you plan to purchase as your collateral. Collateral is what the lender gets if you happen to default on your loan. 

A mortgage loan is similar but different. A mortgage loan can be used to purchase a home, build a home, make home improvements, or even buy something expensive, or take a vacation. But, like a home loan, your property is collateral should you default. 

Mortgage Payment Breakdown

There are four parts to the monthly mortgage payment you make. These are principle, interest, taxes, and insurance.

• Principal. The principal is the amount of money you actually borrow from the lender. When you first begin to pay back the loan with your mortgage payments, the amount of money in the payment that goes toward the principal is quite low. The majority of your payment initially goes toward interest.
• Interest. Interest is the money paid to the lender for lending to you. The more money you owe them, the more interest you need to pay. Therefore, as you pay down the loan, the amount of money you pay in interest decreases and the amount of money going toward your principal increases. However, if you have a fixed-rate loan, the amount of interest you pay every month always remains the same, no matter how close you are to paying off the loan. 
• Taxes. You will have to pay property taxes anywhere you live in the United States. While you have a mortgage loan, the lender takes money from your mortgage payments to go toward these taxes. Once the loan is paid off, you are responsible for paying these taxes yourself. 
• Insurance. Part of your monthly mortgage payment goes toward insurance. Homeowner’s insurance is insurance to cover the cost of major repairs or damage to your home. If a tree falls on your roof or your hot water heater leaks, homeowner’s insurance should cover the cost. Another type of insurance that might be included in your mortgage payment is mortgage insurance. Not everyone has to pay this insurance. If you don’t have a lot of money for a down payment or if the lender thinks you might be a high risk, they might require you to have mortgage insurance. This type of insurance pays the lender if you default on your loan.

Mortgage Payment Formula

As you consider buying a home, using a mortgage calculator might help you plan things out. This tool helps you figure out what your future mortgage payment will be. Just enter some basic information, such as your down payment amount, the length and interest rate of your loan, and the property’s price. As you enter different amounts for your down payment, you will see how it affects your monthly mortgage payment. 

Knowing how much your mortgage payment might be helps you know whether or not you can afford a mortgage payment plus all your other day-to-day bills and expenses.

Seek Out a Mortgage Professional

These are uncertain times, and if you are looking into buying a home, an important first step should be to seek out a mortgage professional. A professional will interview you to find out what your goals are as well as your limitations. And they will work to help you become pre-qualified for a mortgage loan. Plus, a mortgage professional will be able to answer all the questions you may have about buying a home during these turbulent economic times. 

MortgageWorks offers financing for new home purchase, refinance, home equity, investment property, construction, and a wide variety of loan program options to fit your every need.

Servicing California and the entire Coachella Valley, including Palm Springs, Cathedral City, Rancho Mirage, Indian Wells, Palm Desert, Desert Hot Springs, La Quinta, Indio and Coachella. Call Art today @ (760) 883-5700

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.