You might think the answer to such a question as we pose in the title of this installment of Curbed U simple. But actually, mortgages are complex and head-ache-worthy, though a bit of education goes a long way to alleviating the pain.
Payment Breakdown
Your mortgage isn't just paying your loan back in slow, steady payments. It's more- much more, in fact. Loan lingo, heavy on acronyms, calls the formula for calculating a mortgage PITI. You'd be forgiven for thinking this sounds like an affectionate term for a diminutive pit bull, but in fact, it stands for the four factors of your monthly payment.
P: Principal
Loans are structured so that the amount of principal returned to the borrower starts out small because you're mainly paying interest at first. During the final years of your loan's term, your payments consist more of principal repayment than interest.
I: Interest
The lender hasn't given you a gift here: the interest you pay makes the risk of loaning to you more appetizing. Whatever interest rate you settle on when you sign for your loan has direct impact on your house payments. Simply put: Higher interest means your payments will be bigger. (Note this interest may or may not be a fixed rate, depending on the type of mortgage you purchased.) Investopedia offers an example:
"If the interest rate on a $100,000 mortgage is 6%, the combined principal and interest monthly payment on a 30-year mortgage would be something like $599.55 ($500 interest + $99.55 principal). The same loan with a 9% interest rate results in a monthly payment of $804.62." (To check the specifics of your case, use this calculator.)
T: Taxes
Homeowners pay property taxes, something renters haven't ever paid (at least not directly, since it's possible their rents have been used by their landlords to pay these taxes). In turn, the city uses this money to fund various public institutions such as schools, police, and fire departments. Your property taxes are based on the value of your home and land, and are assessed at your loan's outset. Californians, because of Prop 13, can rely on property taxes not rising dramatically with the market's fluctuation unless they make major repairs/renovations to their properties, or if they sell their properties. New buyers pay current rates, not those the seller has been enjoying in past years. You have the option of paying those taxes upfront each year or you can decide to wrap them into the mortgage, dividing into 12 payments that become part of the monthly house payment.
I: Insurance
Insurance on your property is part of your mortgage. Your lender wants that house protected in case of disaster, after all, but you have to pay for the protection. Your home insurance then becomes part of your house payment.
Down Payments and House Payments
If you do not pay 20% down on your loan, you will most likely have to pay a (acronym alert!) PMI. That stands for Private Mortgage Insurance, and is a fee that minimizes the lender's risk for paying out more money for your loan. Your PMI can add several hundred dollars to your monthly payment, possibly less, possibly more, depending on the specific numbers involved with your loan (check out this PMI calculator here). But, in most cases, you can drop the PMI once you have earned 20% equity in your home, so keep track of those payments in case your lender forgets to alert you. Forgetting to do so isn't legal, but that doesn't mean you shouldn't be keeping your own records, just in case.
· Understanding the Mortgage Payment Structure [Investopedia]
· All Curbed University coverage [Curbed SF]
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