Mortgages can seem a bit confusing, and it is best to break this down. Many believe that their loan amount will decrease by the amount of the payment. It is a bit more complicated than that.
To better understand when and how you will pay your home loan off, it is best to understand how your payment is applied to your loan balance. To break it down, there are four components to a mortgage payment: principal, interest, taxes, and insurance.
The principal is the actual amount of the loan. It is commonly misunderstood that the percentage of the payment that goes to principal increases over time. This is not true; therefore, you cannot just divide the principal by the number of payments to know how much is paid off. In the beginning, you will not be paying much principal. If you choose to pay extra on your mortgage payment, be sure to apply the amount directly to the principal.
This is another part of your loan. In the beginning, you will pay more interest. Payments applied to the interest of your loan will decrease over the course of your loan. The amount of interest you pay is based on a lot of factors such as the length of the loan, loan amount, and credit score. The lower the interest rate, the better.
Property taxes are usually used to fund local public services. Your lender likely will collect them as part of your payment and hold them in escrow, so you are not hit with a huge tax bill at the end of the year.
Two kinds of insurance may be added to your loan payment. The first is homeowner’s insurance. This makes sure the home is properly insured against any potential hazards. The second is private mortgage insurance (PMI). If your down payment is less than 20%, then PMI will be added to your loan payment.
Mortgage loans can be complicated or misunderstood, but they do not have to be. Your loan payment is made up of these four components. Contact us for your mortgage loan needs.