As a future home buyer you have clicked around a mortgage calculator or two. But have you ever stopped to consider what the numbers really mean?
Sure, you just want to get an idea of what you can afford but knowing how fees and rates affect your final monthly payment is important. Being mortgage smart can save you time and money when it comes time to settle on a loan.
Your monthly mortgage payment consists of 4 parts; principal, interest, taxes and insurance (PITI):
Principal (AKA loan amount) – The amount of the payment that goes towards paying down the loan amount. Since, for most loans, part of your mortgage payment gets applied towards principal, over time, your outstanding principal balance will go down.
Interest – The interest rate lenders charge is the cost of the borrowed money. The interest and principal payments equal your monthly mortgage payment.
Taxes –Most lenders will collect this as part of your monthly payment and then pay your local government on your behalf. This is commonly referred to as tax escrow. The local government where the home is located will assess your home and determine its real estate taxes.
Insurance – Homeowner’s insurance (or Hazard insurance) covers you in the event of damage to your property. This is required at the time of settlement and can be escrowed as part of your monthly payment.
And if your down payment is less than 20% of the value of the house, the lender will usually require private mortgage insurance in addition.
Private Mortgage Insurance (PMI) –Private mortgage insurance may be required to protect your lender in the event you fail to repay your mortgage. According to Federalreserve.gov, by federal law your PMI payments will automatically stop when you acquire 22% equity in your home as long as your mortgage payments are current.