A first time homebuyer may be wondering this question. When you're trying to figure out how much house you can afford, most will ask what the monthly payment will be.
When you want to figure your payment you need to take 4 things into consideration. I use the acronym PITI to describe these four items.
Let me explain these four mortgage payment principles:
There you go....that is what makes up your total mortgage payment. Now let's go into how you get these figures.
The principal portion is the part of your mortgage payment that reduces your loan balance. So if you borrowed $200,000 from the lender, each month a small part (see example below to find out why) goes toward the balance.
The other portion of the payment is the interest. Usually, you pay a higher amount of interest early in the mortgage than you do towards the end.
When you get a home loan, you can ask for an amortization of your loan so you can see the breakdown of principle and interest for the entire mortgage. At the end of this page I'll give you an awesome tip to use with this amortization schedule, so be sure to ask for it!
Below is a breakdown of what an amortization schedule will look like. I used an example of a $200,000 mortgage with a fixed interest rate of 6% for 30 years.
After 30 years or 360 payments, you will have paid $431,676.00 for the home. You can see that you will pay a lot of interest for the home. Want to pay less? I'll explain how later.
But right now we are talking about the total mortgage payment. The payment of $1,199.10 on the example above is the principle and interest portion, but if you escrow your taxes and insurance, then your payment will be higher. Why?
You are asking the lender to manage the taxes and insurance for your home. They are going to take what you need in taxes and insurance for the year and divide by 12, then they add that to your payment. That is the "T" and "I" portion of the acronym PITI.
At closing they will collect from you what they need to pay the taxes and insurance for now. Some of this figure may go into escrow depending on when your taxes are due.
Then, the amount that is added to your monthly payment for the future taxes and insurance payments will be deposited into the escrow account. That way the lending company has the necessary funds accumulated to pay these bills.
I highly recommend you escrow your taxes and insurance. That way those are paid promptly and you don't have to come up with a high amount of money to cover them.
There you go....the total mortgage payment! The principle and interest payment plus a portion of your taxes and home owners insurance.
Below I'll give a link to a page I discuss more about this escrow account. But for now let me give you more information about this payment. After that I'll show you how you can save money on your interest!
When you look at the payment in the above example, the P&I part is $1,199.10 for 360 months or your total mortgage payment. In
the first month, when you make your payment, $199.10 goes to
the principal of your loan balance. The interest for that month is
$1,000.00, and that goes to the bank not your home loan balance.
When you look at the 12 months I used above, you notice each month you pay less in interest and more on the principal.
So it does not take a rocket scientists to know that you pay more than double for your house over the 30 years. Of course if your interest rate is higher you’ll pay even more.
So that takes care of the P&I part of the PITI.
Now to the other 2 parts T&I or Taxes and Insurance. The taxes are what your county and state charge you on a yearly basis for the privilege of living in the neighborhood. This part of your total mortgage payment is a variable. Since I cannot possibly know the taxes and insurance figures for everywhere I'll have to estimate.
Taxes are usually figured on a percentage of the value of your home.
Using an escrow account, the lender collects 1/12th of the yearly property tax bill and places it in your escrow fund. Most states require taxes to be paid in advance, some are in the arrears.
The last part of this is the home owners insurance. Lenders will not allow you to close on a property unless you have hazard insurance to cover the home and your personal property. This insurance protects you against fires, theft and other natural disasters. I have more on insurance elsewhere on this site. You must be careful here also since you could find yourself lacking in coverage for water damage and other things.
Most first time homebuyers have the lender collect this insurance money each month and place it in your escrow fund as well. In some cases you can keep it out of your payment if you are on some type of a payment plan with your insurance carrier for cars, home and so on.
Like your taxes, you can have 1/12th collected each month so when your yearly premium comes due the money’s there to pay for it.
Again, using the same example above your total mortgage payment or PITI would look like this:
1,199.00 Mortgage Pm"t & Int.
+ 326.00 Monthly Portion of Taxes
+ 31.48 Monthly Portion of Home Ins.
$1,556.58 Total Monthly Payment
Now keep in mind that the homeowners insurance and taxes can vary depending on where you live. These are estimates only for your instruction.
Also note that PMI (private mortgage insurance) is not included in this example. If your loan to value is 80% or less, then you do not need to pay PMI. If your loan to value is higher than 80%, well, you may have PMI added to your total mortgage payment. Below is a link to an explanation of that as well.
As you can see, principal and interest make up the largest part of your total mortgage payment. As your loan matures then a larger portion of your payment goes towards the principal of your loan.
Now let me give you a little tip. When you get an amortization schedule with your mortgage, you will notice that the principle portion is small. If you can afford to, pay the next month's principle portion. That's like making an extra payment!
So, in the above example, you would pay an extra $200.10. You now saved the interest portion of $999.00. When you make these extra payments early in the mortgage, you save a lot of interest.
Just think of that, for an extra $200.10 you made an extra monthly payment! Of course, this only works if you can afford to do so. By doing this, you actually pay your mortgage off early and save tons of money in interest.
Unfortunately, I didn't know about this for my first mortgage. I did use this principle on the second home we bought. At that time, our principle portion was only $20.00, so we paid and extra $60.00 each month. That was like making three additional payments.
Of course, the principle portion goes up as time goes on, so we altered how much we paid. We just followed the amortization schedule to know how much extra to pay.
Check out my many mortgage calculators. Be sure to play with them as much as you like. You can use them to figure your total mortgage payment as well.
Here is the link I mentioned to understanding mortgage escrow accounts.
Would you like to understand PMI more? Click here for more details.
What about home loans? Loans for Homebuying gives an awesome explanation.
Perhaps you want to understand the various programs out there. Homebuying Programs breaks down the different programs to help you make a choice.
Go to House Buyer Solutions Home Page.
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