How are Mortgage Payments Calculated?
A monthly mortgage payment consists of multiple factors. The basic calculation of any mortgage payment is principal + interest + real estate taxes + private mortgage insurance.
After the closing process on your house, you will receive the most crucial part of a mortgage payment, which is called the principal. This is the actual amount of money that you have borrowed from the lender. The principal balance adjusts every time you make a payment. When you make payments towards your mortgage, the balance of the loan decreases, and your home equity increases. Your starting principal balance is composed of the purchase price, combined with the fees rolled into the mortgage, minus the down payment you made.
Monthly mortgage payments also include interest. Interest accumulates throughout the loan period. No matter if it is a fixed rate or adjustable rate, interest accrues annually. To calculate how much interest goes into your payments, take the annual percentage rate and divide it by twelve. Then take that number and multiply it by your principal balance. The more you pay off your mortgage, the more your interest will shrink down to nearly nothing. Keep in mind that you can refinance your mortgage at any time you feel necessary.
Taxes are the third component of your monthly mortgage payment. This variable of the amount fluctuates on two factors: the assessed value of your home and the mill rate in your local jurisdiction. Both factors continuously change over time, so you must stay up to date. You can do this by checking the assessed value of your home frequently and checking up on your local tax policy.
Homeowners who have not paid off their mortgage are required to have homeowner’s insurance coverage. Depending on the area you live in, the price of insurance can vary. For those in disaster-prone regions or high crime areas, it will be more expensive. Additionally, if you are a subprime borrower, you must also carry supplemental mortgage insurance due to the risk of default. Private mortgage insurance (PMI) is necessary until you have paid enough principal to own 20% of the equity in your home.