Heres a crash course on whats included in your mortgage payment. The easiest way to remember where your monthly payments are going is the acronym PITI.
P– Principle. Principle is the actual amount you own on a home. This is about the only part of the payment you will be happy making. In the beginning, principal payments are relatively low and gradually over time increase as you will pay more and more off in an amortization schedule. Never look at the amortization schedule unless you want to cry. But its the name of the game when borrowing money and the pros greatly outweigh the cons when it means you are able to leverage money into an asset instead of renting. The more principal you pay off, the more equity you will have in your home.
I– Interest. Not like interest from that the creepy guy at the bar staring at you… But the interest rate being charged against what principle is owned on the house. While interest literally is just the cost of doing business to get a loan, it is one of the major itemized deductions homeowners can use for their taxes. This item can be found on schedule E.
T– Taxes. These are typically paid as part of the mortgage payment. Property taxes are based on the assessed value of your home. The funds go to support the local city and county school systems, public servants, roads, etc. Your taxes can change based on the value of your home or funding public works. In Utah, they are paid in November but they are put into an escrow account throughout the year as part of your mortgage payment.
I– Insurance. Homeowners insurance is property insurance that covers loss, damages, and liability coverage for the owner. This can also cover flood insurance or other local risks. Less talked about is PMI or Private Mortgage Insurance. This insurance is required if you buy a house with less than 20% down. It protects the lender in the scenario the you end up in foreclosure. There are exceptions for PMI based on the loan or you can buy it out up front and avoid the monthly payments. With some loans, PMI will automatically drop off when you hit 78% LTV, or loan to value.
I know this stuff can get confusing. If you have any questions, reach out to me and I am happy to help with your individual situation and customize a plan thats best for your goals. We can also connect you with a lender who can tell you exactly what you payment will given your down payment and credit score.