Thinking about buying your first home? A mortgage allows you to purchase a home and finance most of the cost over time. Your mortgage payment is a significant part of your monthly budget and includes more than just a house payment. Let’s take a closer look at the four components of a typical mortgage payment.
Principal is the amount of the purchase price you still owe on the home. A portion of each mortgage payment is dedicated to repayment of the principal balance. Loans are structured so the amount of your payment applied to the principal balance starts out low and increases with each payment. You’ll pay less toward the principal each month at the beginning of the mortgage and more toward the principal at the end of the mortgage term.
Interest is the lender’s compensation for taking a risk and loaning you money. The interest rate on a mortgage directly impacts the amount of a mortgage payment – a higher interest rate means a higher mortgage payment. That also means higher interest rates reduce the amount of money you can borrow. The best time to buy a home is when interest rates are low.
Real estate or property taxes are assessed by government agencies and are used to fund public services such as schools, police and fire departments, and roads and highways. Taxes are calculated by the government on an annual basis, but you can pay these taxes as part of your monthly mortgage payment. The amount due is divided by the total number of monthly mortgage payments each year. The lender collects the payments and holds them in escrow until the taxes are due.
Like real estate taxes, insurance payments are made with each mortgage payment and held in escrow until the bill is due. There are two types of insurance coverage that may be included in a mortgage payment. Property insurance is required on most mortgages, which protects the home and its contents from fire, theft, and other disasters. Private Mortgage Insurance (PMI) is mandatory for homebuyers with a down payment of less than 20% of the purchase price. This type of insurance protects the lender in the event the borrower is unable to repay the loan. PMI can be dropped once the borrower has at least 20% equity in the home.
Baltimore County Employees Federal Credit Union has been helping members purchase or refinance homes for over 55 years. We have a variety of loan options including fixed and adjustable rates, FHA and VA loans – all with competitive rates and no hidden fees to help you make the most of your budget Visit our mortgage page to learn more. Our experienced Mortgage Counselors can help you choose the mortgage plan that is right for you. Contact a Mortgage Counselor at 410-828-4730, 800-234-4730, or [email protected].