What's Included In My Mortgage Payments?
Your monthly mortgage payment is made up of several components. This housing expense is commonly referred to as "PITI" or principal, interest, taxes and insurance. PMI (see below) and homeowner’s association dues may also make up a portion of your total payment.
The original balance of money loaned, excluding interest. Also, the remaining balance of a loan, excluding interest. Interest is calculated based on the principal.
The charge, in dollars, for the use (loan) of the money.
The county assessor determines the property tax based on the value of your home. There are two tax installments due each year. The first installment is due November 1st and is delinquent after December 10th. The second installment is due February 1st and is delinquent after April 10th.
Taxes may be impounded, depending on the amount of your down payment. (A down payment of less than 20% usually requires an impound account).
An impound account, set up by the lender, is a trust account to which a portion of the monthly payment is credited so that funds will be available for the payment of taxes and insurance when they’re due. This way, the lender actually pays your tax bill for you. (Supplemental taxes usually are still the responsibility of the homeowner.)
An insurance policy pays for the loss of a home from certain hazards, including fire. You obtain homeowner’s insurance from your own insurance agent. The standard policy pays replacement costs, minus depreciation based on actual cash value. Talk to your insurance agent about the different types of insurance available. Hazard insurance expense may also be impounded in the trust account with taxes.
Private Mortgage Insurance (PMI)
Depending on the amount of your down payment, you may be required to have PMI. A down payment of less than 20% usually requires PMI. Because loans with small down payments involve substantially more risk for the lender, they need protection in case the loan goes into foreclosure. Mortgage insurance helps cover the lender’s loss in the event of a foreclosure. Because of this insurance, lenders are able to offer loans with lower down payments.
PMI premiums are collected monthly as a part of your mortgage payment. The cost of PMI varies with the amount of your down payment. Can you pay off your loan ahead of schedule? Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.
Lastly, be sure to ask your lender to remove the PMI Insurance from the loan when you have reached 20% equity in the home. You should not have to pay this insurance for the life of the loan.