September 26th, 2019 5:15 PM by Davis Love
Do you ever wonder what you’re actually going to be paying for every month when you make a mortgage payment? Good news, it’s actually pretty simple.
For most, your monthly payment is going to include your mortgage payment and your escrow payment. In other words, your monthly payment on your statement is combined into one number, but each month you are paying these items:
Let’s go over the mortgage payment first, because that will apply to everyone. Your monthly mortgage payment is simply a set amount of money that is calculated so that the entire principal balance of your loan and all interest that accumulates over the loan term (i.e. 30 years or 15 years) will be paid off at the end of that term. If you have a $200,000 loan, over the term of your loan you will pay $200,000 in principal and a predetermined amount of interest based on your interest rate. But, your payments are designed so that you pay more interest early in the life of the loan, and more principal later in the life of the loan. So, your monthly mortgage payment will always cover both the principal and interest associated with your loan, and the amount paid each month will not change, but the way that payment is allocated changes throughout the life of the loan.
It’s important to note that this applies only to fixed loans. Other loan types, like Adjustable Rate Mortgages (ARM), might have adjusted payments at some point during the life of the loan.
If your “loan to value” is higher than 80%, you will also have an escrow account. See our previous post on escrow accounts for more details on what an escrow account is. What you should know in the context of your payment is this: if you have an escrow account, your monthly payment will include the payment to your escrow account. If your loan amount is more than 80% of the value of your house, you will have an escrow account. If it is less, you may have an escrow account, or you may be able to choose to pay those items separately.
The three categories are fairly simple. Your escrow account will include your property taxes, your homeowner’s insurance, and your monthly mortgage insurance payment. On most, but not all loan programs, the mortgage insurance may be canceled after a certain amount of time or reduction of your loan to value below 80%. Additionally, if you have a VA loan, you will not have mortgage insurance.
The escrow payment is where the greater variables lie in determining what your total monthly payment will be. The property taxes and homeowner’s insurance are annual fees that will be divided up for your payments each month. Your lender will perform an escrow analysis at least once a year to ensure they are collecting enough funds on a monthly basis to pay those bills when they are due. So, if your taxes go up (because taxes never go down, of course), or your homeowner’s insurance changes, your escrow payment will change and so your total monthly payment will change.
And that’s it! There are a lot of numbers involved when you get a mortgage, but if you want to know how your monthly payment is determined, these are the categories where you want to look closely.