What's Included in a Monthly Home Loan Payment?
Below is a breakdown of the most common elements of a home loan payment.
Annual Percentage Rates All lenders are required by law to state the total cost of obtaining home loan financing, which is reflected through the Annual Percentage Rate (APR). The APR will almost always be higher than an interest rate because it factors in fees and other costs associated with your loan plus the interest rate.
Escrow Funds Escrow funds are like a mandatory savings account tied to your home loan payment. An escrow account will hold homebuyer money for property taxes, insurance and other items until these are required to be paid. The amount paid to escrow may fluctuate over the life of the loan based on changes to property taxes.
Interest Rates Finding a good interest rate is important because it can save you tens of thousands of dollars in interest payments over the life of your loan. While there is no shortage of advertising for interest rates, an advertised rate may only be available for a short period of time or reserved for qualified borrowers for specific types of loans. Moreover, interest rates change daily.
Principal and Interest Payments (PITI) Monthly home loan payments are primarily made up of principal, interest, taxes and insurance payments.
The amount you borrow is known as the principal on your loan. The interest is what the lender charges for lending the money. Typically, each monthly home loan payment will go toward paying off the principal loan balance and interest. Most monthly payments also include additional amounts for taxes and insurance.
The part of your payment that goes to principal reduces the amount you owe. The part that goes to interest doesn't reduce your balance.
At the start of your loan term, you owe more interest because your loan balance is still high. Near the end of the loan, you owe less interest, and most of your payment goes to pay off the principal. This process is known as amortization.
Loan terms can usually be shortened when borrowers pay more than the minimum loan payment each month. The additional funds go to pay down the principal loan balance.
Mortgage Insurance (MI) Mortgage Insurance is money paid by borrowers to insure the loan when a down payment is less than 20 percent. Mortgage insurance may be paid as an add-on to a monthly mortgage payment, paid upfront or at closing. The amount required is determined based on loan program type, property type, credit score and ratio of the loan value to the value of the property being purchased.