What is Included in a Mortgage Payment?

If you’re a first-time home buyer, you may be wondering, What is included in a mortgage payment? As you research mortgages, have you heard terms like “escrow” and “principal”? Or maybe you haven’t thought about it until now! In this article, we’re going to break down a mortgage payment for you and reveal what terms like that, and more, mean.  

Five Components of a Mortgage Payment

A mortgage payment includes principal, interest, mortgage insurance, property taxes, and homeowner’s insurance. The combination of these components allows you to build equity, pay down debt, stay current on your taxes, and protect your home with one easy payment. 

Principal

The principal balance of your loan is what is owed in order to pay off your home. Your monthly principal payment goes toward that balance. It is worth pointing out that you have the option every month to make additional payments toward the principal. Doing so can save you thousands of dollars in interest and you will pay off your home sooner. If it is something you can afford to do, we definitely recommend it. 

Interest

Interest is the cost of borrowing money and this portion of your payment goes toward that cost. When the market offers lower interest rates than what you currently have, you may want to investigate refinancing. Refinancing pays off your current mortgage and gives you a new one at a lower borrowing cost. 

Mortgage Insurance

Mortgage insurance will only be included in your mortgage payment if you put less than 20% down. When you put less than 20% down, mortgage investors see your loan as riskier because the amount you owe is relatively close to what the home is worth. They mitigate this risk by charging a premium that can eventually be removed once you have paid off 20% of what the home is worth.   

Property Taxes (Escrow)

One of the most convenient features of your mortgage payment is the escrow portion, which pays for two things. First, is your property taxes. Most local governments issue a tax bill twice a year. Instead of making large bi-annual payments yourself, you contribute a small amount of funds to an escrow account every month. When the tax bills come, they go directly to your mortgage servicer who pays it for you using the money in your escrow account. 

Insurance (Escrow)

The second thing your escrow payment goes toward is your homeowner’s insurance. Your insurance premium is paid once per year, so, just like with your tax payments, it’s nice to put a small amount away every month instead of receiving one big bill. Also, like your tax payments, the bill is paid by your mortgage servicer. 

What can change and what stays the same? 

What is included in your mortgage payment are things that can go up and down in cost and things that never change. Your property taxes and insurance premiums are the most variable components, so your escrow payment may be adjusted year-to-year. It is important to note, we don’t just mean the payment can go up because there are scenarios in which it goes down. For example, local governments sometimes raise taxes only temporarily to complete large-scale projects. Additionally, you can re-shop homeowner’s insurance whenever you feel is necessary to find a policy with a lower premium.  

We’ve mentioned mortgage insurance can eventually be removed altogether but, in the meantime, it will not change. The one thing that absolutely never changes is your principal and interest payment if you opt for a fixed-rate mortgage. Remember, in order to get a lower interest rate by refinancing, you will receive an entirely new mortgage. Otherwise, you could have the exact same principal and interest payment for up to 30 years! Imagine what that’s like in comparison to renting.  

Get Mortgage Smart 

Whether you’re researching what is included in a mortgage payment or trying to find answers to big questions like how much you can afford, talking to a mortgage banker is a great way to become an educated home buyer. That’s what mortgage experts are here for! If you’re ready to get mortgage smart, fill out a pre-approval and receive personalized advice.