Mortgage Basics – What’s Included in Your Payment?

If you’re thinking about buying a home, you’ve probably run a number of properties through a sample mortgage rate calculator, which estimates your monthly payment based on a number of different factors.  Depending on the complexity of the calculator, you might even be surprised to see how much home you can afford – especially if you compare these numbers to the average rents in most major metropolitan areas.

However, buying a home and taking on a mortgage isn’t simply a matter of trading your monthly rent check for a mortgage payment.  There are a number of other figures involved that you’ll need to take into consideration.

Principle & Interest – If you’ve ever held a commercial loan before, you’re likely already familiar with these terms, but let’s take a second to review them.  The principle of your mortgage loan represents the purchase price of the home you buy – if you buy a home for $200,000, the principle on your loan is $200,000.  The interest, on the other hand, represents the charges your bank assesses in order to lend you money.  This is expressed as a rate, just like you’ll see with credit cards or other loans.

Taxes – As a property owner, you’ll have to pay taxes each year, based on the assessed value of your home.  Depending on the state where you live and the bank you get your mortgage from, an estimated monthly tax payment may be incorporated into your mortgage payment.  If this is the case for you, the tax payments will be held in an escrow account through your mortgage lender, who will take care of paying the tax bill when it comes due.  If you aren’t eligible for this service, it’s still smart to set a little money aside each month – this way, you won’t get surprised with a big tax bill at the end of the year.

Insurance – Homeowner’s insurance is a must have.  This policy will be responsible for replacing your home and belongings in the event of a major disaster, so it’s not something to take lightly!  Again, depending on your bank, this monthly payment may be incorporated into your mortgage payment, or it may be something you pay separately on your own.  Your mortgage broker can help you to understand how these policies are set up and what requirements you’ll need to meet.

Homeowner Association Fees – If you live in a condo community, you’re likely represented by a Homeowner’s Association that takes care of common area maintenance and provides such amenities as lawn service, pools or community rooms (depending on your condo complex).  This isn’t something that’s negotiable – it’s a requirement for every person who buys a unit in the community – so be sure you can afford this extra expense in addition to your mortgage.  Condo fees typically range from $100-400/month, depending on the number of services and amenities that are available.

Buying a home is a big step – you aren’t just moving into a new home, you’re making a major financial commitment that you need to be sure you can live up to.  By taking the time to estimate your monthly mortgage expenses, you can ensure that you remain on solid financial footing in your new home.