Understanding Your Payments
- The total cost of a mortgage has four elements:
- Principal - the amount you borrow, which has to be repaid over time.
- Interest - the cost that lenders charge for the use of their money during your repayment schedule.
- Taxes - taxes are an assessment that local governments collect on property to pay for local services. Property tax rates will vary by location and can affect your total cost and affordability.
- Insurance - (Homeowners) Insurance will be required to replace the value of loan in the event of a disaster such as fire, earthquake, flood, etc.
- These four cost components:
Principal + Interest + Taxes + Insurance (PITI)
= Total Cost of Your Mortgage Loan
Many times buyers ignore these additional costs when figuring how much of a home they can afford.
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- Property taxes and insurance costs must be collected and paid when they are due.
In most cases, lenders will make the collection by allocating each month to your mortgage payment the amount you need to pay for taxes and insurance.
These collections are placed in escrow, a depository account that the bank manages.
- Your total monthly payment will include payments for
real estate taxes, insurance, and Private Mortgage Insurance (PMI) and other items that are placed in escrow and used to pay taxes, insurance, PMI and other items on your behalf when they come due.
Note that the escrow portion of your monthly payment may increase or decrease, depending on the change of your taxes and insurance assessments.
If your mortgage does not have an escrow account, you will be required to pay your taxes and insurance separately and show proof of payment to your lender.
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- Your county and city may levy taxes on your property.
These taxes pay for government services such as schools, roads, police, and other community services.
- The annual tax is usually calculated as a percentage (factor) of your property's appraised market value.
For example, an assessment may look like this:
$0.94 per $100 in appraised value
this calculates into a tax factor of 0.94% on the appraised value of your home
- Many of these local real estate taxes may qualify for tax deductions.
Check with your tax advisor for more information.
At your home closing, you will be required to prepay up to one year's cost of your property tax.
Then each month, your loan payment will include 1/12 of the annual property tax that will be deposited in your escrow account until the property tax payment is due.
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- You may be required to carry hazard insurance
on your home in the event of a fire, flood, disaster, and any other natural disaster that destroys or partially destroys your home.
The insurance will protect your investment (and the lender's) and repair any damage that may occur. The annual premium may vary depending on your home area and location. You must provide proof of insurance before closing and settlement.
- At your closing, you may be required to prepay up to one year's cost of hazardous insurance.
Then each month your loan payment will include 1/12 of the annual hazard insurance premium to be deposited in your escrow account until payment is due.
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What About Private Mortgage Insurance Costs (PMI)?
- Private Mortgage Insurance (PMI) is mortgage default insurance
that is required for all conventional mortgage loans with less than a 20% down payment. It is designed to pay the lender a portion of the outstanding balance of a loan in the event the homeowner defaults.
- If PMI is required as part of your loan,
the initial annual premium will be included in your closing costs while your subsequent premiums (1/12th of your annual premium) will be included in your monthly mortgage payments and deposited in your escrow account.
You need to check with your lender to estimate your cost percentage for PMI if your down payment is less than 20%. Nationally, the average annual percentage is around 0.005 of your loan balance.
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