What’s In a Mortgage, Anyway? We Break it Down.
Understanding your mortgage payment is essential to your budget. Despite the name, it likely encompasses more than just paying back your lender, so comprehending what it’s comprised of is important for the future.
What are the pieces to the mysterious puzzle that will hold your checkbook captive for the next 15-30 years? Let’s break it down piece by piece. When you can visualize where your money goes, you are empowered to be an active participant in the buying process and be better prepared for the long-term impacts of your decisions.
Breaking Down the Payment
Dave Ramsey is a financial wizard, and his blog is a great place to read more about the basics. He starts with dissecting what he calls the “four horsemen.” These are Principal, Interest, Property Taxes and Homeowner’s Insurance, otherwise known as PITI.
Principal is the money you actually borrowed from the lender to purchase your home. Interest is what it costs to borrow that money over a period of time (and it’s how lenders make money). It’s calculated as an annual percentage of the principal. There are often multiple interest options available to borrowers. A fixed rate offers a consistent charge throughout the loan, while variable rates may change after an introductory period or as the lending market fluctuates.
Next are property taxes, which can vary each year depending on your assessed value, which is different from your market value. These taxes have the potential to change if your assessed value increases or decreases for various reasons.
Last is your homeowner’s insurance, which, along with your property taxes, are often paid into an escrow account. Your small monthly portions to both of these are held until their annual due dates and then distributed to the correct entities by your lender, ensuring both your insurance and taxes are paid.
Mortgage Payments for Every Budget
Knowing that PITI, as well as the length of your loan, will determine your monthly mortgage payments, it is important to choose a loan that fits your budget and won’t be hiding any surprise charges. The list price of the home is not the only number you should focus on.
Factor in your PITI and choose wisely with this long-term commitment. The best bet is utilizing a trusted lender (like us!) to walk you through the costs and help ensure you’ve found not only your dream home but a payment that fits your budget.
Visit OpenMortgage.com today to learn more about the loan options available to you.