Thursday, February 17, 2011

Your Monthly Mortgage Payment

How is My Mortgage Payment Calculated?

• There are four basic components of the typical mortgage payment:
–Principal
–Interest
–Taxes
–Insurance
• Sometimes, additional amounts are due monthly:
–Mortgage Insurance
–Condo Owner’s Insurance: HO-6 policy
–Homeowners’ Association fees

Principal and Interest

• Principal = the money you borrowed
• Interest = paid to the lender for the use of the money you borrowed
• With a fully-amortized fixed-rate loan, the amount of principal is very small and the interest is very large at the beginning of the loan term
• Interest due each month = (loan balance X interest rate) / 12

Principal and Interest Example

• Assume a $200,000 loan balance at 5% interest on a 30-year mortgage
• Principal and interest payment = $1073.64

(200,000 X 5%) / 12 = 833.33 interest payment

1073.64 – 833.33 = 240.31 principal payment

Property Taxes and Insurance Escrows

• 1/12th of the annual property taxes and homeowner’s insurance is collected each month by the lender and held in an escrow account until it is due
• When the taxes and insurance payments are due, the lender makes the payments
• Even though the bill comes to the borrower, the lender will pay it
• Conventional (non-government) loans allow a borrower to avoid the escrow account and pay the taxes and insurance themselves, but lenders usually charge .25% of the loan amount at the closing. This is known as an “escrow waiver”.

Mortgage Insurance

• If the loan is for more than 80% of the value of the house, the lender will require mortgage insurance
• 1/12th of the annual mortgage insurance premium is collected by the lender each month as part of the mortgage payment
• VA loans do not have mortgage insurance

Condo Owner’s Insurance

• The Homeowners’ Association will have insurance coverage for the structure, but not for the contents
• If the property is a condo or a townhouse, the lender MAY require the borrower to have condo insurance, covering everything inside the unit
• This is known as an HO-6 insurance policy, and is sometimes referred to as “walls-in” coverage because it insures everything inside the walls of the unit. It is similar to renter’s insurance.
• Some lenders allow the borrower to pay for this insurance themselves, and some lenders require it to be escrowed, like the taxes
• The insurance for the structure is included in the HOA fees

HOA Fees

• If there is a homeowner’s association (HOA), the borrower will need to pay HOA fees
• There is always an HOA with condos and townhouses, and sometimes for planned unit developments (PUDs)
• The HOA fees are NOT part of the mortgage payment, although they do have to be considered when the lender is qualifying the borrower for the loan

Mortgage Payment Review

• Principal (all mortgages, except interest-only loans)
• Interest (all mortgages)
• Taxes (all mortgages, except if the borrower pays the taxes themselves)
Homeowner's Insurance (all mortgages, except condos, a very few townhouses, and when the borrower pays the insurance themselves)
• Mortgage Insurance (if required by the lender)
• Condo Owner’s Insurance (if required by the lender for condos and townhouses)
HOA fees (all condos, all townhouses, some single family residences). Never paid with the mortgage!

Want to watch our video of this tip? Check it out on our web site by clicking here.

Want to make sure your loan closes? Call the Mortgage Experts at 303-345-3683.

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