Every aspect of homebuying can be very confusing. One way to help clients is to ensure they understand their mortgage payment.
Break down each aspect of a mortgage payment with buyers so they feel confident.
Need to Know
What They Need to Know:
- A mortgage is a long-term loan
- A mortgage is made up of two parts: interest and principal payments
- Mortgage payments can contain insurance and/or property and real estate taxes
- Payments are due the first full month that a buyer takes ownership, typically.
What Makes Up a Mortgage Payment?
Typical payments consist of four main parts. The acronym PITI is commonly referred to when referring to all the parts of the mortgage.
P - Principal. The principal is the balance of the loan. For easy math go with a $300,000 mortgage has a $300,000 principal. Each month homeowners pay down the principal of their loan.
I - Interest. This is what we hear about on the news so much. Interest rates are what owners pay their lenders/banks/etc. based on percentage each month. So, a lower interest rate means a lower mortgage payment and the same can be said for a higher interest rate.
T - Taxes. Taxes include one or both of either real estate or property taxes. These taxes, like all others, help fund public services. But, some mortgage companies can impound taxes and pay the taxes quarterly or yearly as needed.
I - Insurance. Just like taxes, insurance is paid monthly and is held with escrow until the bill needs to be paid. Every homeowner pays property insurance but only buyers who paid a down payment less than 20% pay PMI additionally. PMI is insurance in the event that the buyer defaults on their loan.
Very rarely do mortgages not include taxes and insurance, but it does happen. Those monthly payments are of course, lower but the homeowner than has to pay a large chunk of money when the tax and insurance bills are due.
Have a comment, tip, or concern?
Thanks for reading Elite Informer! Here's more where that came from.