What is Included in Monthly Home Loan Payments?
It is useful to find out what is included in your Gray Point Homes monthly home loan payments for budgeting purposes. The acronym PITI is commonly used to remember the items, which are principal, interest, taxes, and insurance. All mortgages do not automatically include each of these. It will vary based on your specific loan.
Paying Down Principal
Principal is basically the balance of your loan. For a typical loan, part of the mortgage payment every month is allocated towards reducing the principal, although there can be exceptions. In the first few years of paying a loan, only a small portion of the payment will go towards principal, but this increases over time.
Interest is the fee charged by lenders for use of their money. The interest rate is typically a yearly rate but billed in monthly increments calculated on the balance of a loan. Based on your type of loan, the interest rate can remain the same for the full term of the loan or it can change at specific intervals.
Taxes are levied by the state according to the assessed value of a property. The total is determined annually but typically due in installments. Overdue property taxes become a lien and take priority over mortgage liens. Many lenders will, as a result, ask homeowners to put aside funds into an escrow account to guarantee that there are enough funds for the bills when they are due. Those funds are collected in monthly increments by the lender as part of the regular mortgage payment. The bank then pays the taxes directly instead of relying on the borrower to do so. It is a way of protecting their interests in a new home.
There are different types of insurance that can apply to a loan. Property is generally a requirement while mortgage insurance varies based on the specific loan. Both may be part of recurring loan payments.
Property insurance protects against hazards such as fire. Lenders mandate this insurance since the home is collateral on the mortgage. Insurance premiums are due annually and most will want funds be put into escrow (similar to tax escrow). They will then submit payments to the insurance company directly to ensure the policy remains active.
Mortgage insurance is common on loans with low down payments. It protects the bank should a homeowner stop making payments. Lenders estimate that they will not recover the full amount of a loan if the home forecloses, so the mortgage insurance covers some of that. Although it benefits the mortgage company, the borrower can be responsible for the payments.
Understanding Your Monthly Home Loan Payments
Not all loans are structured the same and as a result not all monthly home loan payments will contain all of the items above. There can be other monthly expenses such as HOA fees, which are not collected by lenders but are an important element in estimating total monthly home cost. Remember that exact figures are based on a specific property and interest rate, so any preliminary figures are likely to fluctuate. For help understanding your possible loan payments, fill out the form below!