Stage 1 Am I ready?
What makes up your monthly payment
The question: What am I paying for each month?
For: Buyers comparing payments, and anyone reading a Mortgage Plan
The short version
The payment people quote is often just principal and interest. The payment you make each month usually holds more than that. It has up to five parts:
- Principal pays down what you owe.
- Interest is the cost of borrowing, figured each month on the balance you still owe.
- Property taxes are set by the county. Most loans collect them a little each month into an escrow account and pay the bill when it is due.
- Homeowners insurance is required while you have the loan, and it is usually paid from escrow too.
- Mortgage insurance applies to conventional loans with less than 20% down and to FHA and USDA loans. VA loans have none.
On a fixed-rate loan, principal and interest stay the same for the life of the loan. Taxes and insurance can change from year to year, so the escrow part of your payment can rise or fall even when your rate never moves.
HOA dues are paid to the association, not in the mortgage payment, but they count when we figure what you qualify for.
In Southwest Colorado, taxes and insurance differ a lot from home to home: from about $600 a year in taxes and $800 in insurance to about $3,000 of each. That alone can move a payment by a few hundred dollars a month, so we use the home's actual tax bill and a real insurance quote.
The picture
- Interest about 73%
The cost of borrowing, figured on what you still owe - Principal about 11%
Pays down the loan - Property taxes about 6%
Set by the county, held in escrow - Homeowners insurance about 5%
Required by the lender, held in escrow - Mortgage insurance about 4%
Until enough is paid down
Worked example
A $300,000 home
Example- 5% down, conventional
- 30-year fixed
- Example rate 6.75%
- Taxes $1,500 a year
- Insurance $1,400 a year
| InterestThe cost of borrowing, figured on what you still owe | $1,603 |
|---|---|
| PrincipalPays down the loan | $245 |
| Property taxesSet by the county, held in escrow | $125 |
| Homeowners insuranceRequired by the lender, held in escrow | $117 |
| Mortgage insuranceUntil enough is paid down | $95 |
| Monthly payment, first month | $2,185 |
Of the first payment, about $1,603 is interest. Each month a little more goes to principal; on this loan principal passes interest after about 20 years. Once mortgage insurance comes off, the payment drops by $95.
Example amounts on the $300,000 home. Rates change daily. Your Mortgage Plan shows your own numbers.
Try it
Go deeper
Why most of an early payment is interest
Each month, interest is figured on the balance you still owe: the balance times the rate, divided by 12. Early on the balance is at its largest, so interest takes most of the payment. As the balance falls, interest shrinks and principal grows, while the total for principal and interest stays the same.
Extra principal shortens this. See paying extra on your mortgage.
How escrow works
An escrow account holds the money for property taxes and homeowners insurance. Part of each payment goes in, and the servicer pays the bills when they are due. Most loans collect taxes and insurance this way; some conventional loans can skip escrow with a larger down payment.
Once a year the servicer reviews the account. Federal rules let it keep a cushion of up to two months of payments, refund a surplus of $50 or more, and spread a shortage over the coming year. That review is why a payment can change in the first year. See your first year of owning.
What the payment does not include
HOA dues, utilities, upkeep and repairs are paid on their own. If the home is in a mapped flood zone, flood insurance is required and is usually paid from escrow as well. Before you settle on a budget, add the costs a lender leaves out.
Your next step
Lesson 3 of 9 in Am I ready?Where your credit standsYour credit score sets which loans fit and what they cost. VA and USDA set no minimum score, and small changes can move you into better pricing.Read the lessonOr go another way: How the down payment changes the paymentWhat mortgage insurance costs and when it ends