When you pay your mortgage each month, do you really know what you’re paying? If you’re like most people, you have only a vague idea of how mortgages work. You probably know that your monthly payment goes toward your principal, interest, and more, but do you know the way it all works? We’ll break it down for you.
A Breakdown of Your Mortgage Payment
Principal: The most important part of your mortgage payment, of course, is the principal, or amount you borrowed. If you can make additional mortgage payments and have them applied directly to the principal, you’ll be able to pay off your mortgage sooner.
Interest: Each month, you’re paying interest on your outstanding principal balance. As the mortgage proceeds, the ratio of principal to interest shifts as you pay more principal and less interest. At the beginning of your loan, the bulk of your payment goes to interest, but as time goes by and the principal is paid down, you’ll pay much less interest.
Escrow Loan Payment: In many cases, part of your mortgage payment goes into an escrow account each month. The bank holds onto this money and uses that account to pay your property taxes and insurance. That way, you don’t have to remember to pay it.
Private Mortgage Insurance: If you didn’t put at least 20% down on your home, you’re probably required to pay for private mortgage insurance (PMI). The reasoning behind this is that if you don’t put at least 20% down, the loan can be risky for lenders, and PMI protects the lender in case the borrower defaults.
While PMI is an added cost for borrowers, it doesn’t last the life of the loan. Once you pay enough PMI to have 20% equity in your home, you’ll be able to have your lender cancel the PMI.
Once you know the facts about your mortgage payment, it doesn’t seem as intimidating. If you make your payments on time and try to pay a little extra toward your principal each month, you’ll pay off your mortgage in no time.