Your home loan payment may make up a significant part of your monthly budget, so understanding where the mortgage money goes is important.
Contrary to what many people think, you are not just paying back the money you borrow. Here, we explain the four components of a home loan payment — principal, interest, taxes and insurance (PITI) – and the other mortgage-related costs you may have to pay each month.
The principal portion of the mortgage payment is the original amount of money you borrow to buy a home. If the house you purchase costs $200,000 and you put down 20 percent, or $40,000, the initial principal balance is $160,000.
Interest is a percentage of the principal, and it goes directly to the lender as their reward for taking a risk in loaning you money. Early on, the majority of your home loan payment will go toward interest. As time goes on, a larger portion will go toward paying down the principal.
When you buy a home, your local government will charge you property taxes every year to fund public services like police forces, fire departments, schools and roads. Your lender will collect a portion of the taxes each month as part of your home loan payment, holding the funds in an escrow account until the time they are due.
Homeowners insurance protects you in the event your property is stolen or damaged by a natural disaster. Your monthly mortgage payment will include a portion of your insurance premium, which the lender will hold in escrow until it is due. The amount you will have to pay depends upon the home you buy, your location and the type of coverage your policy provides.
Technically, your monthly home loan payment includes just the principal, interest, taxes and insurance. However, you may have other mortgage-related fees that must be paid each month.
Private Mortgage Insurance
If your down payment is less than 20 percent of the price of the home you buy, you will have to carry private mortgage insurance (PMI). This type of coverage protects the lender if you default on the home loan. The amount of your PMI is likely to be between .5 and 1 percent of the principal, and you will pay a portion of the total premium each month.
Homeowners Association Fees
If you buy a home in a private residential community, you may be required to pay homeowners association dues. These typically help cover the costs of landscaping and maintaining common areas. Depending upon your HOA, the monthly fees could be up to a few hundred dollars.
Are you planning to buy a home in northern Utah? Understanding how mortgage payments are structured can help you make a smart investment. For answers to your questions and expert guidance through the mortgage process, turn to Integrity First Lending.
With decades of combined experience in the Utah home lending industry, the Integrity First team makes shopping for a mortgage a smooth and easy experience. Contact our South Jordan or Tooele office to learn how we can help you get a house you love and a home loan payment you can afford.