What goes into the total monthly mortgage payment?
The two biggest components of your monthly mortgage payment are principal (the sum you borrowed to buy the home) and interest (the cost to borrow the principal). But when calculating how much home you can afford, it’s important to understand that principal and interest aren’t the only expenses you’ll have to pay each month.
Homeowners pay property taxes to the local government where the home is located. Property taxes cover community expenses like schools, roads, parks and police. The amount you pay is based on how much the tax assessor determines your property to be worth on a certain date each year. That value is multiplied by the local property tax rate.
If your home is worth $200,000 and the property tax rate is 1%, your property tax bill will be $2,000. In many jurisdictions, property taxes are recalculated annually, and homeowners pay the bill in two installments due about six months apart.
Another key component of your monthly mortgage payment is homeowners insurance. If the home gets damaged, you want to make sure there will be enough money available to rebuild or repair it. The lender also wants to make sure its collateral is protected, so it requires all mortgagees to carry homeowners insurance. You can drop this insurance when you’ve paid off your home, but it’s not a wise decision.
Lenders have a way of making sure your property taxes and homeowners insurance get paid. It’s called an escrow account.
If you have an escrow account, your lender will collect one-twelfth of your monthly homeowners insurance and property tax bills with each monthly mortgage payment. It will then use your escrow account funds to pay these bills in full when they’re due. If you aren’t required to have an escrow account, you’ll pay these bills directly.
Some borrowers choose to have an escrow account even if they aren’t required to because they find it easier to make 12 smaller monthly property tax payments than two large ones.
Finally, borrowers who put down less than 20% often have to pay for private mortgage insurance with each monthly mortgage payment until they accumulate 20% equity or, in the case of FHA loans, for the life of the loan. This insurance protects the lender if you default on your loan.
Find out how much you’ll owe for property taxes, homeowners insurance and, if applicable, private mortgage insurance, then use our calculators, How Much Are My Payments? and How Much Can I Afford? to get an accurate picture of how much home you can buy.