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What Does My Mortgage Payment Cover?

What Does My Mortgage Payment Cover?

If you’re considering buying a home for the first time, it’s important to learn about the different expenses associated with homeownership so you can plan your financial future.

The most significant expense homeowners have is their mortgage. While most people think of a mortgage solely as the money that goes toward paying back their loan, there are several other costs rolled into the payment. Here’s what’s included in a mortgage payment:

1. Principal

You have to pay back what you borrowed! The principal is the money that pays down the original balance on your loan. The amount of your payment that goes toward the principal will increase as time goes on.

2. Interest

The lender charges you interest on the balance of your loan. At the beginning, most of the money you pay toward principal and interest goes toward interest but that balance will shift with time.

If you get a fixed rate mortgage, the sum of principal and interest will remain constant throughout the life of your loan, with only the proportion going to each changing. If you get an Adjustable Rate Mortgage (ARM), the total could be higher or lower based on the fluctuation of the interest rate.

3. Real Estate Taxes

Most lenders set up an escrow account to make sure that homeowners stay up-to-date on their real estate taxes payments. Lenders estimate the total cost for the year, divide that number by twelve and add that amount to the monthly payment they collect.

The funds sit in an escrow account until the lender uses them to make payments on your behalf. Because the amount the lender collects is based on an estimate, you may owe additional money at the end of the year or receive a refund.

The amount you will pay for real estate taxes will change over time because it’s based on the assessed value of the property and the tax rate for the area in which the property is located. Renovations and other home improvements will increase the assessed value of the property, while deteriorations will decrease the value. Similarly, commercial development, environmental issues, and school quality will impact the area’s tax rate. The fluctuations in these two factors drive change in the amount of property tax you’ll owe.

4. Insurance

Insurance payments are handled similarly to real estate taxes: the lender will estimate the total for the year and divide it by twelve, then add that amount onto your monthly payment. The funds will sit in escrow until they’re needed, at which point the lender will make the payment on your behalf.

Your insurance costs include (1) your homeowners’ insurance, (2) hazard insurance like flood insurance, and (3) Private Mortgage Insurance (PMI) if it’s part of your particular loan. PMI is generally required for buyers who put down less than 20% of the cost of the home, but those who put down 20% or more are not required to have it.

Once you have built 20% equity in your home you will no longer be required to pay mortgage insurance, but homeowners’ and hazard insurance must be paid for the life of the loan.

Citywide Home Loans make the loan process simple. Visit to see how much home you can afford and find a loan program that’s right for you.