In this post we learn about the What is Mortgage Payment? Components and PITIA step by step. A regularly scheduled payment which includes principal and interest paid by borrower to lender of home loan. Payment amount can include real estate taxes and property insurance. The original part is used to pay the original loan amount; Interest is paid to the lender.
What is Mortgage Payment?
A mortgage loan is a specific type of long-term loan used to finance the purchase of a home. A mortgage payment is the monthly amount that you need to pay towards your mortgage. Mortgage payments will vary widely on the basis of the amount borrowed (i.e.). "Size" of the loan), the period of time in which the loan should be repaid (i.e."Duration" of the loan) and your interest rate.
The size and duration of the loan will have the biggest impact on monthly payments. Higher loan amount or short loan term will require more monthly payments than small loan amount or longer term loan. However, your interest rate will also affect your monthly payment. The higher the interest rate, the more your payouts will be. A mortgage is a long term loan designed to help you buy a home. In addition to repaying the principal, you also have to pay interest to the lender. The house and its surroundings work as collateral. But if you are looking to own a home, you need to know more than these generalities.
History of Mortgage
Just about everyone who buys a house has a mortgage. A Mortgage rates are often mentioned on the news of the evening, and speculate that the direction in which direction will move, will become a standard part of the financial culture. The modern mortgage came into being in 1934 when the government to help the country overcome the Great Depression created a mortgage program that minimized the required a down payment on a home, increasing the amount potential homeowners could borrow.
Before that, a 50% down payment was required. Today, 20% down payment is desirable, mostly because if your down payment is less than 20%, then you have to remove your personal mortgage insurance (PMI) monthly payments higher. Desirable, however, is not necessarily achievable. According to Nerdwallet, the National Association of Realtors said more than 70% of non-cash, first-time home buyers and 54% of all buyers made down payments of less than 20% over at least the last five years. "There are such mortgage programs that make payments a lot less, but if you can manage that 20%, then you should definitely do it.
What is PITIA?
The acronym PITIA stands for the five most important components of a monthly mortgage payment beyond the size and term of the loan, specifically:
- Principal
- Interest
- Taxes
- Insurance
- Association dues
Changing any of these five factors will affect your estimated monthly payment; Let's see how everyone does this in their own way.
1. Principal
The principal is the amount you actually borrow from the lender. In the example of our $ 250,000 mortgage, the original is $ 250,000. When you start making mortgage payments for the first time, most of your pay will go toward paying the interest (discussion below).However, the amount of principal you pay will increase with every passing month, so that you can bring one step closer to keeping the house free and clear. In the last years of the loan, you will mainly pay the principal.
2. Interest
The Interest is what the lender charges for loaning you the money. The higher the interest rate on a mortgage, the higher the monthly payment. Since interest rates are a major component of affording a home, home buyers are typically able to borrow more when there is a low interest rate. When you first start paying off your mortgage, you will be paying mostly interest.
As time goes on, less of your payment will go to interest and more will go toward paying down the principal. If you pay higher principal in the beginning by making large or extra payments, then you will reduce the total amount of interest paid on the life of the loan. Lets take our $200,000 mortgage as an example. In this case, it is a 30-year fixed-rate mortgage with an interest rate of 6%. (We will get tax and insurance later, so assume that there is no extra charge) The estimated monthly payment for the loan would be a total of $1,342. Here's how this amount breaks between the principal and the interest in the first few years of the mortgage:
| Time frame | Principal | Interest |
|---|---|---|
| Month 1 | $199 | $1000 |
| Month 12 | $210 | $989 |
| Month 24 | $223 | $976 |
| Month 36 | $237 | $962 |
| Month 48 | $252 | $947 |
This trend will continue with rising principal and decreasing interest till the lifetime of your loan, unless you are paying the most of the principal with little interest. For example, up to 300 months (25 years in a mortgage), you pay $ 885 principal and only $ 315 interest. With your last payment, you will pay $ 1,193 in principal and interest only for $ 6.
3. Tax
The Tax on your property is assessed by government agencies and is used to fund specific municipal services such as water treatment and road maintenance, or public schools. It is common for lenders to set up an impound escrow account for real estate taxes, where the lender collects a monthly payment designated for your taxes and holds the total until your annual taxes are due.
A Your annual real estate taxes are divided by 12 and the monthly principal and interest is added to the amount you are paying. Real estate taxes can vary greatly in different areas (and in some areas, they can be quite costly). As soon as you identify an asset in which you are interested, it is important to set the exact local tax rate before closing. Lets take a look at the role of real estate taxes in different areas. Using our example of a 30-year fixed mortgage on a $200,000 home (assuming property appraised at the same value) with 6% interest, here is the breakdown of monthly payments for three different tax rates.
| Property Tax Rate | Annual Property Tax | Annual Mortgage Payment Total | Monthly Mortgage Payment Breakdown |
|---|---|---|---|
| 2% | $4,000 | $18,384 | $199 principal + $1,000 interest + $333 property tax = $1,532 |
| 4% | $8,000 | $22,392 | $199 principal + $1,000 interest + $667 property tax = $1,866 |
| 8% | $16,000 | $30,384 | $199 principal + $1,000 interest + $1,333 property tax = $2,532 |
4. Insurance
There are two types of insurance coverage in home banking process: home insurance insurance and personal mortgage insurance. The first type, homeowners insurance (sometimes referred to as property insurance), protects the buyer in the event the home is damaged by a natural disaster or any other unforeseen event. Homeowners' insurance is generally taxed by real estate; The cost is added to monthly mortgage payments and is kept in escrow as long as it is the amount of insurance depends on your location, the type of home that is purchasing and the type of coverage you want. When buying for home, it is best to get a quote from the insurance agent.
Private mortgage insurance, or PMI, is used when a borrower pays a down payment of less than 20% of the homes cost. This type of insurance protects the lender in case you are unable to repay the loan amount and default on the mortgage. PMI can vary based on several factors, including loan amount, loan-to-value ratio, property type, and credit score. Using our example of a $200,000 mortgage (30-year fixed-rate term and 6% interest), lets say the home itself is worth $250,000. The borrower is only able to put down $37,500 as a down payment, which is 15% of the cost of the home. If the PMI rate is 1%, the annual PMI fee would be $2,000 (.01 x the total loan amount). Split over 12 payments, the borrower would owe an extra $167 each month.
5. Association Dues
The outstanding balance of the association is often ignored in the budget process. If you buy a house in collaboration with a homeowner, then you have to pay the monthly amount to maintain facilities in your union.< Fees can range from a few dollars per month to several hundred, so make sure you keep this in mind while looking for a home.
Preparing for Your Mortgage Payment
Understanding everything going to your monthly mortgage payment is an important starting stage of the home buying process. By calculating the principal, interest, tax, insurance and arrears of the association, you are better at determining how much your dream home will really cost. Use our mortgage calculators to estimate your monthly mortgage payment based on loan amount, annual interest rate, length of the mortgage, and other important factors. What is Mortgage Payment? Components and Understand PITIA is the best part of this articles.