How is My Mortgage Calculated
Did you know that almost half of homeowners have a mortgage on their property? In fact, 44% of consumers make a monthly payment to their mortgage lender. If you’re searching for your dream home, you may be focused on the interior design, a safe neighborhood and top-of-the-line smart features, but it’s also important to consider your mortgage and how it’s calculated.
First, let’s review a few key terms.
1. Mortgage: This is a loan used specifically to purchase a home, land or other types of real estate where the buyer agrees to pay the lender over time with interest. A mortgage is an agreement between the consumer and the lender, using the property as collateral to secure the loan.
2. Lender: A mortgage lender is a financial institution that loans a certain amount of money with the condition that it needs to be repaid within a certain amount of time. There are various types of companies that can offer lending options, including conventional banks, credit unions, non-bank mortgage lenders and mortgage brokers.
3. Mortgage Escrow: The funds or property being held by a neutral third party in real estate transactions. An escrow account holds the funds and is managed by a middleman until the contract is fulfilled.
Now that we have a better understanding of a few mortgage industry terms, let’s explore how your mortgage is calculated. Although you’re making a payment each month, your mortgage will include more than just the cost of the property broken up between each month. Here’s how it breaks down:
1. Mortgage Principal: This is the initial loan amount of your home. For example, if you had $100,000 in cash to make a 20% down payment on a $500,000 home, you would need to borrow $400,000 from the bank to purchase said home. Your mortgage principal in this scenario would be $400,000.
2. Monthly Interest Rate: This is where the bank charges a fee for you to borrow their money. Your monthly interest rate is shown as an annual interest rate percentage. A higher credit score, down payment, and low debt-to-income ratio will typically result in a lower annual interest rate. To calculate what this adds to your monthly payment, divide the annual interest rate by 12 months.
3. Private Mortgage Insurance (PMI): If you put down less than 20% of the home’s purchase price, a PMI is required. It’s common for this monthly fee to be added to your monthly mortgage payment. This usually costs between 0.2% and 2% of your mortgage principal, and some loans allow you to cancel your PMI after reaching a 20% equity stake.
4. Property Taxes: Your monthly mortgage payment may also include property taxes, which are typically based on your home’s location and value. These taxes are collected by your lender, held in a specific account, and paid to the government at the end of the year.
5. Homeowners Insurance: Another cost that’s bundled into your monthly mortgage payment is homeowners insurance, which protects your property by providing coverage to repair or rebuild after damaging events. Coverage on your home will vary depending on your insurance agreement.
Now that we’ve covered the basics of what a home mortgage is and the many factors that compromise your monthly mortgage payment, you can focus on finding your dream home! Visit our Contact Page or call us today at (817) 717-6036 to get the process started