When it comes to mortgages, there are two main components that you need to understand: interest and principal. Interest is the cost of borrowing money, and it is determined by your interest rate and the balance of your loan. Initially, the interest portion of your mortgage payment will be quite high, but it will decrease over time as you owe less and less on the loan. However, this may change if you have an adjustable-rate mortgage.
The principal is the amount you borrowed and you have to repay, and interest is what the lender charges for lending you the money. The second type of mortgage is an interest-only mortgage. Under this concept, the mortgagee pays only the interest rate and nothing else. To determine how much housing you can afford, keep in mind that each component will affect the amount of your monthly payment because a mortgage payment consists of much more than just the amount borrowed. The fourth component of a mortgage is an escrow account. This is an account in which the mortgagee deposits money collected from the mortgagee.
Property taxes and insurance can be part of this account. Security is another essential component of a mortgage; it is a collateral element that is obtained from the mortgagee. When you understand all of these components, how they change over time, and how they can affect capital, you're in a better position to manage your mortgage. Knowing what goes into a mortgage payment can help you make informed decisions about your finances.
