What are the components of a mortgage?

On Behalf of | Dec 13, 2023 | Real Estate Transactions | 0 comments

If you’re in the market for a home, you know that this could be the biggest financial transaction of your life – and you know that you need to be cautious as you proceed. 

Among other things, you need to consider all of your financing options as carefully as possible, since mortgage loans can vary a great deal from lender to lender. As you evaluate all of the potential roads you can take, it helps to have a better understanding of what exactly goes into a mortgage payment. Here are the basics:

1. Principal

This is the original amount of your loan, or whatever you are actually asking the bank to lend you. Typically, the payments you make early in the life of your loan only chip away at a small part of the principal, while most of the money goes to interest. That will reverse itself as your loan ages.

2. Interest

This is the cost of borrowing money. It’s how your lender gets paid for fronting you the money for your purchase. The higher the interest rate you have, the more you end up paying over the life of your loan.

3. Taxes

Property taxes are generally collected on a prorated basis each month by the lender and put into an escrow account. That money is then paid out to your local government when they are due.

4. Insurance 

This can include both homeowners insurance (which is the policy that protects you against losses in case of fire, theft and other disasters) and private mortgage insurance (PMI). PMI protects your lender if you default on your home and you have less than 20% equity. PMI is avoidable if you’re able to put 20% of the home’s purchase price down when you buy the house.

Once you have the basics down about what’s included in your mortgage, you will be better equipped to make informed decisions about your purchase. Just remember that it’s always easier to get through the home buying process when you have experienced legal guidance on your side.