If you are a first time home owner and have never had to deal with a monthly mortgage payment, it can seem confusing at first. How much goes to the principle? How much goes to interest? Why is my monthly mortgage payment more than my initial loan payments? Why has my mortgage payments increased? These are all common questions that you need to have answered.
Monthly Mortgage Payments: The Principle
What most consumers understand as their mortgage payment is the principle. This is the money that goes toward paying down the balance of your loan. Knowing just how much of your monthly mortgage payment goes toward paying down your balance, especially in the early stages of your loan, can be disturbing. The percentage of your monthly mortgage payment that goes to paying down the principle will depend upon the term of the loan (15 year vs. 30 year), the interest rate and the amount that goes toward the escrow. Early on in your loan, you may see only 10 or 15 percent of your monthly payment going toward your principle.
Monthly Mortgage Payments: Interest
Early on in the loan, you can expect to have a large portion of your mortgage payment going to pay off the interest. As you pay down the principle, the amount that goes toward interest will decrease and the amount going toward the principle will increase. The amount you pay in interest can also fluctuate if you have an adjustable rate mortgage. If you want to pay more each month than what is required, be sure to check the box alongside the extra payment to specify that you want the extra money going to your principle balance.
Monthly Mortgage Payments: Escrow and Taxes
Most home mortgage loan payments also include escrow. This is an account you pay into each month from which the lender will pay certain home related bills when they come due. Taxes are one such expense. Taxes from your state and local authorities are estimated by your lender and paid through your escrow account. As taxes rise and fall, so to will your mortgage payment.
Monthly Mortgage Payments: Escrow and Insurance
Insurance is another element of your escrow account and your mortgage payment. The major contributor here is your homeowners insurance and any extra insurance coverage you may need, such as flood insurance or wind and hail homeowners insurance. These will be paid by your lender when they are due, but it is still up to you to make sure they are indeed paid. Another type of insurance that usually is paid through escrow is mortgage protection insurance. Lenders may require you to take out this type of insurance if your principle balance is more than 80 percent of the value of your home. As with taxes, an increase in insurance cost will increase your monthly mortgage payments.
Manage Those Monthly Mortgage Payments
Once you have an understanding of how your mortgage payments are applied, you can better manage your monthly payments. If you choose, you can send in a little extra each month to pay down the principle. If you want, you can remove escrow from your mortgage payments and pay your taxes and homeowners insurance on your own if that makes you feel more comfortable.