What Exactly Makes a Mortgage?

Have you ever wondered what exactly makes up a mortgage? It’s actually a lot simpler than you might think. In fact, you can boil it down to just four letters: PITI. That’s shorthand for Principal, Interest, Taxes, Insurance. These are the four basic components of a monthly mortgage payment, and all four warrant some important explanation. After all, at Fairway of the Carolinas, we don’t want you to become a homeowner without fully understanding where your money is going each month. Following is a short overview of each of the four PITI elements that goes into a new homeowner’s monthly mortgage bill.

1. Principal

This is the amount you pay each month toward the actual home loan. So, the more you can devote to your principal balance, the better. This is because larger principal payments mean ultimately paying the loan off faster. For most of the life of your loan, the principal amount will be higher than what you pay each month in interest, taxes or insurance. It probably won’t be this way at first, however.

2. Interest

This is the price you pay your mortgage lender for borrowing the money to make your home purchase. Starting out, it’s likely the amount you pay in interest each month will actually exceed what you pay in principal. That will change, though, as the total balance of the loan becomes less. For example, paying 3.5 percent in interest against a $200,000 loan is going to mean a lower amount dedicated to interest each month than if you’re paying 3.5 percent interest on a loan where you still owe $275,000. Another way to reduce the amount you pay in monthly interest is to lower your interest rate by refinancing your home mortgage loan. This is a great idea with interest rates still being quite low. Before refinancing, ask yourself these questions

3. Taxes

Local governments issue real estate or property taxes to cover the cost of public services such as schools, police departments and fire departments. The taxes you owe each year in connection with your home mortgage are typically broken down into monthly installments and rolled into your monthly mortgage payment as part of what’s known as your escrow account. In other words, your mortgage company—hopefully, Fairway of the Carolinascollects your tax payments and holds them in escrow until the taxes are actually due.

4. Insurance

Like with taxes, the insurance payments you make as a homeowner are generally held in escrow and paid as part of your monthly mortgage. As a homeowner, you’re going to have a monthly homeowners insurance premium, which you pay to protect your home and avoid incurring a major debt in the event of a disaster such as a home fire. The other insurance you might have to pay each month with your home loan is PMI, which is required for those who make a down payment of less than 20 percent on their home.

Final Thoughts

Have other questions about PITI and all that goes into a monthly mortgage? We’re here to answer all of them! Contact us today at Fairway of the Carolinas so we can put you on a collision course with the home of your dreams in as little time as possible. We hope to hear from you very soon.

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