Just What Does a Mortgage Payment Include? More Than You Think!
Fixed interest rates. Variable interest rates. Principal. 30-year term. 15-year term. Flood insurance. Homeowners insurance. PMI insurance. Property taxes. Escrow account. Turns out, there are more factors influencing your mortgage payment than the cost of the house and the size of your down payment.
Though it sounds complicated, you don’t need a business degree to figure out your mortgage, and what it includes. In fact, you need only remember PITI.
P = Principal. Principal is the portion of the mortgage that is the actual dollar amount due. Early in the term of a loan, the borrower pays more in interest than in principal. Toward the end of the loan’s term, however, the ratio shifts, and the bulk of the mortgage payment is principal.
I = Interest. Interest is payment over and above the loan amount made by the borrower to the lender. Simply put, it is a charge for the privilege of borrowing money. The higher the interest rate, the higher the mortgage payment will be.
T = Taxes. Of course, Uncle Sam wants his cut to help fund schools and public services, like the police and fire departments. You can opt to have property taxes bundled into your mortgage payment to disperse the impact over a 12-month period. Taxes, however, are rarely static. Government agencies annually access property taxes, so while your principal and interest portion of your mortgage can remain steady, the tax portion can rise and fall.
I = Insurance. Like taxes, insurance is another component of your mortgage that fluctuates over time. Plus, there are multiple kinds of insurance to purchase potentially: homeowners (property) insurance, which protects your home and its contents from fire, theft, and disasters; flood insurance, which is optional but not covered in most homeowners plans; and private mortgage insurance (PMI), which is required if you put less than 20% down on your home and protects the lender if the borrower is unable to repay the loan.
You can opt for a mortgage payment that only covers interest and principal. If you go this route, you will have to budget for tax and insurance payments and make these payments on your own.
So Where Does an Escrow Account Come into Play?
In real estate, an escrow account is held by a mortgage company, which takes on a custodial role, holding funds on your behalf and making insurance and tax payments when due. It’s an easy, convenient way to manage your property taxes (those are not optional – as Ben Franklin once wrote, taxes and death are the only two constants of life) and insurance premiums for your home. Rolling these two obligations into one monthly payment mitigates the need to budget – and pay – for them separately.
Trying to decide if your mortgage payment should simply include principal and interest or the whole shebang, with taxes and insurance thrown in for good measure? The mortgage professionals at Aksarben Mortgage have over 30 years of expertise to share with you. Reach out today for guidance on how best to structure your mortgage.
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