Your home is one of the most important purchases you’ll make in your lifetime. But paying off a mortgage isn’t like paying down a car, credit card, or student loan. Just like owning a home, it’s complex, and a variety of factors go into determining your monthly payment.
- Size, or principal, the amount of money you borrow.
- Interest, the fee you pay the lender for borrowing money. Interest rates will play a role in how much home you can afford. In general, the lower interest rates are, the more homebuyers can borrow.
- Term, the length of time your mortgage will last.
- Taxes, which can vary from city to city or county to county.
- Homeowner’s insurance, which protects a home from things like fires, burglary, or natural disasters.
- Private mortgage insurance, typically necessary if a buyer or owner does not put 20% down or own 20% of the equity in a home.
- These factors are typically held in escrow before being paid annually.
Calculating your monthly payments
Your monthly payments are a combination of your principal, interest, taxes, and insurance, also known as PITI. In the beginning, your monthly payment will mostly be interest, though some of it will also go to your principal. Toward the end, you’ll be paying more toward the principal than the interest. Taxes and insurance can also be included in your payment.
Longer terms usually have smaller monthly payments than shorter ones. A 30-year mortgage will very likely have more manageable monthly payments than a 20- or 10-year mortgage.
Investopedia: “Understanding the Mortgage Payment Structure” http://bit.ly/1O67lcs
Consumer Financial Protection Bureau: “How Do Mortgage Lenders Calculate Monthly Payments?” http://bit.ly/2p9VRvi
The Seattle Times: “How Mortgage Payments and Interest Are Calculated” http://bit.ly/2oAsl3T
Homes.com: “Mortgage 101: Understanding Your Monthly Mortgage Payment” http://bit.ly/2oZ6mVu
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