When it comes to mortgages, it's important to understand the five components that make up your monthly payment. Knowing what each part of your mortgage payment is and how it affects your budget or cash flow can help you make informed decisions about your loan. The main components of a mortgage payment are principal, interest, insurance, taxes, and closing costs. Let's take a closer look at each one.
Principal: This is the amount of money that the lender lent you. It's important to note that a larger amount of principal is usually repaid during the later half of your loan. The first seven years of a 30-year loan will be used primarily for interest payments.
Interest
: This is the fee you pay to the bank for lending you the money.Your lender wants to recover their interest before starting to reduce principal. Your credit score and history are used as a tool to determine the estimated risk associated with you as a borrower. The higher your credit score, the better your chances of getting approved for a mortgage and getting a lower interest rate.
Insurance
: If you bought your home with a down payment of less than 20%, you make a payment that is included in your monthly mortgage for monthly private mortgage insurance (PMI).This money is considered a protection against default on the part of your loan. For conventional loans, you continue to make this payment until you have 20% equity in your property.
Taxes
: Property taxes are usually included in your monthly mortgage payment. The amount of taxes you pay depends on where you live and the value of your home.Closing Costs: These are additional costs associated with buying or refinancing a home. Closing costs can include appraisal fees, title fees, attorney fees, and more. It's important to understand how each component of your mortgage payment affects your budget or cash flow. Knowing what each part is and how it works can help you make informed decisions about your loan.
Additionally, if you're looking to pay off your mortgage before the original loan term, be sure to review your mortgage documents and check with your lender about possible prepayment penalties.
