5 Things You Need To Understand About How Your Mortgage Payment Works

If you want to purchase a home, pretty soon you will be making a mortgage payment. Your mortgage payment goes to a variety of different expenses and funds, and those payments work together towards paying off your home and protecting your investment.

Loan Interest

When you make your monthly mortgage payment, a portion of your payment will go towards the interest on your loan. The interest is essentially the money that the bank is making on your loan. Your interest rate for your loan will have been established upfront for your loan when your mortgage terms were established.

Loan Principle

Part of the amount that you pay each month will go towards the principle of your loan. This is the actual amount that you took out and borrowed. Each month, you will slowly chip away at the amount of money that you took out for your home. This portion of your payment goes towards the loan principal.

Mortgage Insurance

With some loans, you are required to carry mortgage insurance. If you are required to carry mortgage insurance on your loan, then a small portion of each month's payment will go towards the mortgage insurance that you carry.

With many loans, you are only required to carry mortgage insurance for a portion of the loan, and not for the entire life of the loan. If you eventually don't have to carry mortgage insurance anymore, the money that was going towards your mortgage insurance will instead go towards your loan interest and principle instead.

Property Taxes

Some loans are set-up to pay your property taxes each year. The bank has a vested interest in having you pay your property taxes. If you fail to pay your property taxes, then the city or county could take your home back for failure to pay your property taxes. The bank does not want this to happen, thus many banks add in your property taxes to your loan, collecting the amount for your property taxes and paying them for you each year. The amount for your property taxes is withheld from your monthly mortgage payments in an escrow account.

Homeowner's Insurance

Additionally, some banks also require you to carry homeowner's insurance and wrap that into your escrow amount. So the portion of your monthly payment that goes into your escrow account covers both your property taxes and your homeowner's insurance.

When you make a mortgage payment, you are doing more than paying down the principal balance on your loan. You are also paying down the interest on your loan, as well as your mortgage insurance, property taxes and homeowner's insurance.

For more information, contact a business such as Rio Grande Credit Union.