How to Figure Monthly Mortgage Payments

Your monthly mortgage payment is made up of many different elements. When you write your monthly mortgage payment check, you aren’t just paying toward the principal of your home loan. You’re also paying the interest component of the mortgage loans and a portion of the real estate taxes, homeowners insurance, mortgage insurance and possibly other fees. The type of loan and the mortgage lender requirements will determine the components of the monthly mortgage payment and how to figure the monthly mortgage payments.

Some mortgage loans will not require an escrow for taxes an insurance which means the home loan borrower will pay these costs on their own and will not be included as part of the monthly mortgage payment. Some mortgage loans require only interest payments and do not include the principal repayment component in the monthly mortgage payment. However, the most common components in a standard monthly mortgage payment include the principal, interest, taxes and insurance. The abbreviation for this is PITI.

The main component of the mortgage payment starts with the principal amount of the loan. This is the sum of money that is initially borrowed from the mortgage lender. From here, you look at how long you will have to repay this amount to the mortgage lender; this is the term of the loan. The term of the loan is its duration or the length of time for repayment. In order to determine the principal and interest portion of the monthly mortgage payment, the mortgage interest rate for the loan is needed.

The mortgage interest rate is the rate at which the mortgage lender charges you for borrowing the money. The interest rate can be fixed or adjustable with the adjustable rate having either preset adjustment amount or adjustments that are based on an index with only maximum and/or minimum rate changes. Once we have the basics of the mortgage interest rate charged, principal balance borrowed and the length or term of the loan we can calculate the monthly principal and interest payments.

Amortization is a lending term used to define the repayment of a debt over time. In the early stages of a loan most of the monthly payment will go towards paying the interest on the loan with very little being allocated toward principal payment. In the later life of the loan more of the monthly mortgage payment goes more towards reducing the principal balance. A mortgage’s amortization schedule can provide a detailed look at precisely what portion of each mortgage payment is dedicated to each component of loan principal and the mortgage interest.

Along with the month principal and interest payment, most monthly mortgage payments include a portion of the real estate taxes for the property and the homeowner insurance. These payments are generally referred to as the escrow payments.

The escrow is an account separate from the mortgage account in which funds are held for payment on select accounts that apply to the mortgage. The escrow account can be esatblished to handle a number of different payments but the most common escrow acounst are established for paymnet of property taxes and property insurance.

The monthly mortgage payment will often include a payment for one twelfth of the annual real estate taxes each month to be placed in the escrow account. Taxes are calculated by the government agencies not the mortgage lender, the mortgage lender collects the payments and holds them in the escrow account until the taxes are due to be paid to the appropriate taxing authority. Mortgage lenders pass these tax payments on to the borrower monthly, because if they are not paid, the government can have a lien placed against the home. Escrowing these taxes ensures the lender that they will be paid. Some home loans offer the option to waive escrow; in these cases the borrower will pay their taxes and insurance on their own.

Most mortgage lenders require a homeowner’s insurance policy that covers at least the amount of the mortgage loan. The mortgage lender will generally require that the first year of homeowner’s insurance be paid in full at closing. The lender will then collect one twelfth of the annual premium with the monthly mortgage payment and place that amount in escrow until the full insurance premium comes due and is paid to the insurance company.

If the mortgage loan has a loan to value ratio of over 80 percent or greater, there will often be mortgage insurance premium added to the monthly mortgage payment. This type of insurance covers the mortgage lender in case the mortgage loan borrower defaults on the loan. In cases of default, the mortgage insurance company that the premium is paid to reimburses the mortgage lender for specific losses and loss amounts. If there is a down payment of 20 percent or more or on a refinance transaction, of the loan to value is 80 percent or less, the mortgage insurance premium is not required.

This entry was posted on Wednesday, May 25th, 2011 at 3:56 pm and is filed under Mortgage Information. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.