Congratulations! You have just entered a contract to buy your first house. It's an exciting time that instills feelings of security for you and your family, but also confusion and anxiety when considering the upcoming monthly payments. While your mortgage payments can be structured in a variety of ways, we want to help guide you through the typical 30-year fixed rate payment, and what elements are included.
For simplicity purposes we are using the term "mortgage payment" to represent your total monthly payment to escrow, including interest, principle, and other expenses that escrow regularly collects.
1. Interest - Interest is the portion of your mortgage payment that represent the fee owed to the bank for lending you funds. This portion of your mortgage represents the bulk of your payment in the beginning of a mortgage, then over time, becomes less as you pay down the mortgage. If you take out a $200,000 mortgage over 30 years with an interest rate of 4%, your first year of payments will total $11,457.96, which includes $7,935.92 in interest. The remaining $3,522.04 is applied to your principle, and represents the value you "own" in the home.
2. Principle - When you make your mortgage payment, principle is the portion of the payment that is paid to the lender to reduce the overall amount owed on your loan, while also representing the equity you now own in your home. Principle payments start out as a small percentage of the overall mortgage payment, about 30% in year one for our example above, and will become the majority of your mortgage payment in year 14. In the final year of payments, your loan principle will represent $11,214.11 of $11,458.59, over 97%.
3. Property Taxes - Property taxes are in addition to the amounts listed above and can vary widely by state. New Jersey has the highest effective rate at 2.38% ($396 per month), and Hawaii has the lowest effective rate at .28% ($47 per month). Additionally some, states like California restricts property taxes to 1 percent of property values and caps increases in those values at 2 percent a year. Other states have no cap on the increase in your home value for property tax purposes, therefore property tax liabilities can increase dramatically during a housing boom. It is important to understand how your state treats property taxes and how it will impact your mortgage payment. Additionally, property taxes can be paid separately from your total mortgage payment, but in many cases is included.
4. Insurance - Homeowner's insurance is required by lenders and is in addition to the costs described above. Like property taxes, homeowner's insurance can be paid directly to the insurance provider, or as part of your total mortgage payment. According to the Federal Reserve Bureau, the average monthly premium cost for homeowners insurance is between $25 and $83.
5. Private Mortgage Insurance (PMI) - PMI is applied to conventional and other loans where buyers do not include a 20% downpayment. This insurance protects the lender by compensating them for lending a larger percentage of the home's value to buyers. Like homeowner's insurance and property tax, it is added in addition to the principle and interest payments on loans which it is required.
6. Home Owners Association (HOA) - Homes that are designated as part of a HOA will often incur a monthly or annual HOA fee that is in addition to the costs listed above. In some cases these fees are part of the total mortgage payment, but not always. HOA dues can increase or decrease as the HOA Board and HOA rules allow. Additionally, some HOAs can require additional outlays for special projects or other activities in addition to the periodic payments.
In summary, your mortgage payment can be a fairly complex beast. Each of these elements has additional nuance that make understanding your payment challenging, both when the loan is originated and over the years after. In addition to these elements research and estimating utility payments, home maintenance, and other factors will help you make a Wyse decision.