A mortgage payment is typically billed at the beginning of each month and is made up of 4 components. These are the Principal, Interest, Taxes, and Insurance (PITI), as defined below.
The taxes and insurance portion of the payment may either be included in the monthly payment to the mortgage servicer and held in an escrow account or paid directly by homeowners themselves.
Most borrowers choose the escrow account option because it saves the trouble of remembering to set aside the funds and pay the bills directly when they come due. Monthly escrow payments are estimated and adjusted by your mortgage servicer on an annual basis. Funds in an escrow account also earn a small amount of interest.
Your monthly payment is calculated using a formula that involves the APR and amortization tables and includes the components mentioned above. But you don’t need to be a math expert to estimate a payment amount!
We’ve got a handy APM mortgage calculator to help you out! You can play around with different loan and purchase price amounts to get an idea of what your estimated payment would be for different scenarios.
You will notice that the amount of principal that you owe on a home loan will not decrease by the same amount through your loan term. A large portion of your monthly payments in the beginning years of the term will go toward interest costs. As time goes on and your principal amount decreases, more of your monthly payment amount will go toward the principal amount, reducing it at a faster rate. This does not change the loan term or your payment amounts.
Through your home loan process, you’ll be given the exact amount of your upcoming monthly mortgage payments, which will help you plan for the expense. It’s a good idea to set aside 2-3 months worth of mortgage payments at the beginning so that you don’t risk falling behind if anything unexpected happens.
You will actually prepay your beginning mortgage payment in the closing costs of your home loan, so when you move into your home, you will have a delay until the following month before you start sending your monthly payments to your mortgage servicer. Try setting aside the amount you would have paid that first month toward future mortgage expenses.
As you consider your monthly mortgage payments, check out our other posts to see how changing the way you make your payments might impact your home loan:
Now that you have a better understanding of what is included in a mortgage payment, it will be easier to estimate your monthly expenses and take some of the mystery out of the homebuying journey.
We’re here to help you find the loan options that will work with your budget. Contact one of our friendly loan advisors today!