If you are about to purchase your first home and get your first mortgage loan, you might have questions about how much your payments will be and what is included in these payments. If you are wondering about these types of things, here is an explanation of what expenses are part of a typical mortgage payment. Knowing this will help you understand how much your payments will be and why they are the amount they are.
Principal and Interest
The majority of the money you pay each month for your payments to your lender will go towards the principal and interest on your loan. The principal amount refers to money you are paying towards the balance of your loan. For example, if you borrow $100,000 to buy a house, part of your payment each month will be applied to the $100,000 principal balance you have leaving you with a lower balance each month. The interest you pay is based on the interest rate on your loan, and you pay this money each month to pay for the costs of your loan. The interest is basically the lender's profit from giving you a loan.
As the months progress, your loan payment will remain the same; however, the amount applied towards the principal will keep increasing and the amount for interest will keep decreasing.
There are certain loan types that require paying mortgage insurance, which is often called private mortgage insurance (PMI). The amount you pay is based on a percentage of the original balance of your loan, and it is money you will have to pay on top of your principal and interest payment each month. Fortunately, mortgage insurance payments do not last forever. When the loan-to-value ratio of your house and loan falls below a certain percentage, you can ask the lender to remove the mortgage insurance requirement.
You might also have one other added expense to your mortgage payment each month for your escrow account. Your escrow account is an account used to help you save money on a monthly basis to pay for escrowed expenses. The two most common escrowed expenses are homeowner's insurance premiums and property taxes. There are lenders that do not require the use of an escrow account for these types of expenses, but most lenders prefer using them.
These are the typical expenses that lenders include in mortgage payments. To learn more about how much you can afford, talk to a loan officer of your choice who works on home loans.