Mortgage payment taxonomy
You might know that fixed-rate loans let borrowers make consistent
and even mortgage payments throughout the course of the term.
Any mortgage payment consists of two essential parts. The first
is the principal payment. The principal is the amount of money
you originally borrowed in order to buy the house. This amount
is ever decreasing, meaning that your principal reduces, at least
a little, every time you make a mortgage payment.
The second essential part of your mortgage payment is the interest
payment. Interest is extra money that you pay your lender in return
for helping you finance your house.
Unlike the principal, the amount of interest is ever increasing.
(Note: that’s the amount of money you pay toward interest,
not the interest rate itself.) Of course, amortization schedules
help to spread out your interest payments over time so that you
get the best possible deal.
Depending on your loan, there might be other charges tacked on
to your mortgage payment. Probably the most common of these is
private mortgage insurance (PMI). PMI is only required for certain
buyers who are deemed relatively unlikely to follow through with
the loan agreement. While the charge can be rolled into your monthly
payment, many people pay it as a separate premium.
You might also roll costs like title insurance and property taxes
into your monthly payment. Your ability to do this will depend
on the state in which you live, as laws vary across the nation.
Many people like lumping these costs in with their monthly payment
to avoid having to pay such bills sporadically which in the long
term makes budgeting more difficult.