November 1, 2019
Making your mortgage payment is a regular part of your monthly routine. However, the breakdown of that payment changes almost every month. Part of your payment goes to principal, some to interest, and you may also be paying for private mortgage insurance or an escrow account. Knowing whereyour money is going can allow you to better understand the status of your mortgage.
The principal of your loan is the amount that you borrowed. This is the most important portion of your mortgage payment, as paying down the principal is how you eventually pay off your mortgage. If you decide to make additional mortgage payments in order to pay off the loan faster, these extra payments will be applied directly to the principal balance and will reduce the term of the loan and the overall interest you pay.
In conjunction with principal payments, you are also making monthly interest payments. The bank calculates the amount of interest for the month based on the outstanding principal balance, so as the term of the mortgage proceeds, the ratio between the principal and interest amounts shifts in each payment. At the beginning of the mortgage, your payment goes mostly to interest because the principal balance is high. As the principal balance is paid off, the interest payment goes down.
If your mortgage was taken out with a high loan-to-value ratio, meaning that the loan amount was more than 80 percent of the value of the home, the lender may require that you carry private mortgage insurance. Because high loan-to-value ratios are risky to lenders, they can require this type of insurance to protect them in the event that borrowers default on their mortgages. Your PMI payment is not typically a large portion of your mortgage payment, but the Federal Reserve Bank of San Francisco notes that you have the right to request cancellation of PMI once the principal reaches 80 percent of the original purchase price or appraised value.
Depending on your lender and your preferences, you may also pay into an escrow account every month. If part of your mortgage payment goes into escrow, the bank will hold this money for the payment of property taxes and insurance. This setup allows you to pay these charges on a monthly basis instead of as a lump sum once a year. Another benefit is that the bank will handle the tax and insurance payments for you. While an escrow account adds to the monthly mortgage payment, it may be a useful way to budget for the yearly expenses of owning your home.
Before making a decision about your mortgage, such as whether to refinance, ask the lender for a breakdown of your current monthly payment. While refinancing might lower your payments overall, remember that payments on a new loan will be mostly interest--and this can increase the time it takes to pay off your loan and its costs. Obtaining information about your payments from the lender will also help you monitor your loan and determine when you can eliminate PMI.
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Phone: (516) 909-9213 or at (813) 699-1800
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