Buying your first home can be (but shouldn’t be) an intimidating process. Many buyers make mistakes when purchasing their first home because they don’t know enough about the mortgage market or what to expect when applying for a loan and making mortgage payments; however, there are many quick and easy ways to prepare for the mortgage process. First and foremost, it’s important to understand the components of your mortgage payment. Here’s what you need to know.

Basically, a mortgage is a loan used to purchase a home. The type of mortgage you select will depend on your financial needs, including the loan term, loan size and down payment that works best for you. Each of these elements will help determine your mortgage payments. Then, each payment will consist of the following:

Mortgage Principal: With each loan, a portion of your money will be used towards repaying the mortgage principal. This refers to the outstanding amount of money owed to the lender. So with each mortgage payment, your mortgage principal will decrease.

Interest: Mortgage interest is the percentage owed in addition to your mortgage principal. This rate is directly related to the perceived risk of the borrower. In other words, if the borrower is a high risk to the lender and may likely default on payment, then this borrower will have a higher interest rate than a borrower that is deemed unlikely to default on payment.

Property Taxes: Taxes are typically collected by the lender as part of the borrower’s mortgage payments and held in escrow until it is time to pay the government. This money is applied towards real estate taxes, which cover local public services like park construction and school renovations.

Property Insurance: Similar to taxes, you will pay your insurance fees with each mortgage payment. Property insurance protects your home from disaster. This money will also be held in escrow until the policy is due.

Mortgage Insurance: Another insurance that is collected in your monthly payment is mortgage insurance, which is required for all homeowners who make a down payment of anything less than 20 percent. PMI (private mortgage insurance) or FHA monthly mortgage insurance is insurance that pays the private mortgage insurance carriers or FHA for higher risk loans due to smaller down payments.

Overall, by understanding the components of a mortgage payment, you better prepare yourself for the complete home buying process. For more information mortgage principal, interest, taxes, or insurance, or to learn more about transitioning into homeownership, contact one of our real estate experts or complete the form below for more information.

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