Monthly Mortgage Payments…Deconstructed

calcualtorThere is, of course, more to a monthly mortgage payment than just the cost of the house itself. Read on to learn more about each part of a monthly mortgage payment.

For most homeowners, a monthly mortgage payment is made up of four parts, referred to as PITI:

P- Principal
I- Interest
T- Taxes
I- Insurance

Principle and Interest:
These two elements are the basis for all home loans. The principal is the money you are paying towards the amount you’ve borrowed, and the interest is the money you are paying to borrow that amount.

Taxes and Insurance:
pmiAll homeowners must pay taxes. They must also have some kind of homeowner’s insurance. In most instances, the homeowner will put funds towards these two expenses into an “escrow account” each month, along with their monthly mortgage payment. The lender will manage the escrow account, and pay the taxes and insurance when it’s due.

Private Mortgage Insurance:
If you put down less than 20 percent of the selling price at closing, your loan will most likely require an additional type of insurance called private mortgage insurance (PMI). This insurance protects the lender in case you default on your loan.

Let’s take a look at an example of a monthly mortgage payment with PMI:

A couple finds a home for $250,000. They make a down payment of 5%, or $12,500. The annual property taxes for the home are $2,650, and the annual homeowner’s insurance is $780. They will be making monthly payments for these expenses as part of their monthly mortgage payment and the funds will be put towards their escrow account. Because their down payment was less than 20%, their lender also requires that they purchase private mortgage insurance (PMI).
The couple has a 30-year fixed mortgage and an interest rate of 4%, so their monthly mortgage payment will be:

Principal and Interest (P and I): $1,133.86
Monthly Property Taxes (T): $220.83
Monthly Property Insurance (I): $65.00
Private Mortgage Insurance (PMI): $106.88
Total Payment: $1,526.57

If you have questions about the mortgage process or are ready to prequalify for a home loan, contact me today.

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