Even if you’ve never owned a house before, you likely already know that a mortgage payment will likely make up a significant portion of your budget each month. What you may be surprised to find out, however, is that your mortgage is so much more than just a house payment.
There are a number of different fees, taxes, and other line items that you may have never even heard of — all built into the mortgage that you pay each month.
Fortunately, these items are relatively easy to understand, once you know what you’re looking at. Let’s take a closer look at some of the things that are important to understand about your mortgage payment.
Line Items on Your Mortgage Payments
On your mortgage statement, you can expect to see a breakdown of various charges. Here’s what you are likely to see:
- Mortgage principal. This is simply the money owed to pay your loan balance. This amount is strictly based on the amount of money you borrowed and does not include interest.
- Interest. Each month, a portion of what you pay goes directly toward the interest on your mortgage. This is a percentage charged to the balance of the loan as repayment to your lender.
- Escrow balance. To put it simply, escrow is money that is set aside so that an outside party can pay expenses on your behalf, such as property taxes and the premiums for your homeowner’s insurance. This is a legal requirement, and homeowners are required to pay a portion of their estimated annual costs each month.
What is Covered by Escrow?
You may also see your escrow payment broken down into even more specific line items, rather than specifically labeled as “escrow”. The fees and charges that are associated with these line items are nearly always set aside in a specific escrow account:
- Property taxes. Property taxes are the responsibility of the homeowner (that’s you). Each month, your mortgage payment includes approximately 1/12 of your annual property tax payment. This specific payment is often kept aside in an escrow account, as previously mentioned.
- Homeowners insurance. This may show up on your statement as simply “insurance.” Before closing, you’ll make the initial year of payments, as part of the closing costs you pay. This type of insurance covers you against losses related to your house, such as damage from hail or fire. After the first year, similar to your property taxes, you will pay approximately 1/12 of your annual expense each month as part of your ongoing mortgage payment. Typically, the homeowner’s insurance company will be paid twice a year from the balance that has accumulated in your escrow account.
- Mortgage insurance. Depending on a number of factors, you may or not be required to pay mortgage insurance. If you paid less than 20 percent down on your home, or if you took out an FHA loan, you can expect to see mortgage insurance somewhere on your statement. This insurance serves one purpose: to protect your lender against losing its investment, should you default on your mortgage.
Homeownership is exciting — especially as you start to see the light at the end of the mortgage tunnel. But remember that owning a home is a marathon and not a sprint, with the average length of any mortgage usually being no shorter than 15 years and most often closer to 30 years after the initial purchase of a home.
A lot can happen in that period of time. It’s essential that you understand your mortgage payment structure, as well as your options for refinancing, which may help to lower your monthly mortgage payment.
Understanding Mortgage Payments with Reali
Whether you’re just getting started or you’re a seasoned home buyer, we’ve got your back. If you’re in the market to buy or sell, we would love to help.
We also offer honest, efficient home loans — convenient, no fees, and completely online. Learn more about how to buy a home with Reali and apply for a home loan today.