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Deciphering Your Mortgage Payment

What makes up a monthly mortgage payment? The acronym is PITI (Principal, Interest, Taxes and Insurance)

Example:

30 year fixed rate at 4.54 annual percentage rate.

Home price: $250K

20% down: $50K

Loan amount: $200K

Monthly mortgage payment: $1,335.

Loan payments are amortized or divided into equal periodic payments calculated to pay-off the debt at the end of the fixed period. Therefore, this monthly mortgage amount will be paid over 30 years to payoff this loan.

The monthly payment of $1,335 is made up of: $261 toward the Principal balance, $757 to the interest on the balance (goes to the bank), $250 is set aside to pay property taxes, and $67 is set aside to pay your insurance company its annual home owners insurance on the property.

Taxes, $250.00

Interest, $757.00

Insurance, $67.00

Principle, $261.00

The monthly amount that is set aside for taxes and property insurance is held in an Escrow account by the bank on your behalf. When the property tax bill and the insurance policy is due, the bank will pay these bills from your escrow account.

Did You Know

Until recently, an unmarried woman who purchased a home was titled Spinster on all mortgage documents?

How Much House Can You Afford?

This is a big question – you probably want to get as much house as you can, but over extending yourself here can really foul up your finances. A simple way to figure out how much of a payment you can afford would be to take your monthly income, before taxes, and multiply it by 28%. That’s how much a manageable monthly payment might be for you, including taxes, insurance and PMI.

Example 5000 x 28% = 1400

Another good benchmark is to spend no more than 36% of your gross monthly income on your total debt, including your mortgage payment and other debt like car payments and credit card payments. This is the debt-to-income ratio. If you are paying more, you may have to lower your mortgage payment.

Example: monthly debt for student loans, credit card, auto, other = 400 plus a monthly mortgage payment = $1400. 1800 monthly debt payments / 5000 = 36%

Debt to income calculators

Zillow Debt to Income

How much house can you afford calculators

Fidelity

Zillow Calculator

Housing and Lending Terms

Fixed Rate Mortgage – Loan where the interest rate is the same for the entire length of the loan (usually 30 years). The principle and interest payments are the same amount every month, and your payment won’t change if interest rates go up. This type of mortgage is ideal for homebuyers who plan on remaining in the home for a long time.

Adjustable-rate Mortgage – Loan where the interest rate changes, depending on the type of loan you choose. Some loans offer an initial fixed rate period (3,5,7 or 10 years). These loans frequently offer a lower interest rate than fixed-rate mortgages. If rates go down, your monthly payment could go down, but if rates go up, so could your payment. This type of mortgage is ideal for homebuyers who may relocate within 3-5 years.

Equity - the value of the home, less any remaining mortgage payments

Escrow Account –an account held by your mortgage company to pay for fees and taxes associated with your mortgage (typically including closing costs, property taxes, home owner’s insurance).

Private Mortgage Insurance (PMI) – An additional insurance program that will be applied to your monthly mortgage costs if you have than 20% of the home value in equity. Once you have at least 20% equity, you may have the PMI taken off of your monthly payment.