As a first-time home buyer, it’s important to understand the structure of your mortgage payments if you want to manage your finances effectively and have a smooth homeownership journey. Many first-time buyers don’t realize that their mortgage payments typically consist of four components. In this post, our team at Your Home Sold Guaranteed Realty - Nancy Kowalik Group will discuss each of these four parts of a mortgage payment, and what purpose they serve in the overall repayment structure.
- The principal is the main balance that makes up a mortgage– it’s the original loan amount you borrowed from the lender to purchase your home.
- Interest is the cost of borrowing money from the lender. It’s calculated based on the remaining balance of your loan.
- Lenders often collect property taxes as part of your monthly mortgage payment and hold them in an escrow account.
What Are the Four Parts of a Mortgage Payment?
The principal is the main balance that makes up a mortgage– it’s the original loan amount you borrowed from the lender to purchase your home. You’ll pay down a portion of the principal each time you make a mortgage amount. Over time, this will gradually reduce the amount you owe to the lender. Paying down the principal also helps you build equity in your home, which can be beneficial if you decide to sell or refinance in the future.
Interest is the cost of borrowing money from the lender. It’s calculated based on the remaining balance of your loan. During the early years of your mortgage term, the majority of your monthly payment will go towards paying interest, with only a small portion allocated to the principal. Over time, as the loan balance decreases, a greater percentage of each payment will go towards reducing the principal amount owed.
The amount you pay in property taxes is determined by your local government, and is based on the assessed value of your property. Your lender will typically collect property taxes as part of your monthly mortgage payment and hold them in an escrow account. Then, when property taxes are due, the lender will pay them on your behalf from this account. This ensures your taxes are paid on time and reduces the risk of delinquency or foreclosure.
Homeowners insurance protects your property against damage from hazards such as fire, theft, or natural disasters. Lenders typically require homeowners to carry insurance as a condition of the mortgage agreement. This requirement ensures their investment in the property is protected. Similar to property taxes, insurance payments are often collected as part of your monthly mortgage payment and held in an escrow account. This way, you can be sure your insurance premiums are paid on time and your property is protected.
Nancy Kowalik Can Help You Buy Your Dream Home in South Jersey
By understanding these components and their roles, you can navigate the mortgage process with confidence and make informed financial decisions. Understanding mortgages starts with having a professional realtor by your side.
At Your Home Sold Guaranteed Realty - Nancy Kowalik Group, Nancy Kowalik and our team have years of experience working with home buyers and helping them connect with the top mortgage lenders in South Jersey. Our clients love working with us to buy a home because of our commitment to high-quality customer service, attention to detail, and unique buyer guarantees, like our Buy it Back Guarantee.