Put simply, a mortgage is a loan intended to help a borrower purchase a home. The interest rate is the ROI for the lender, and is used in calculating the monthly payment made to the lender. For a lender to guarantee to make their money back they use the home and land as collateral incase there is a default.
The main components of a loan that you should be aware of are Principal, Interest, Taxes, and Insurance. PITI are major factors when it comes to calculating the loan. Insurance on loans PMI are usually added when the down payment is less than 20%, this insurance protects the lender in case the borrower cannot pay back the loan.
The insurance also allows the lender to sell the loan to investors who will be assured their debt investment will be paid back to them.
While PITI makes up a usual mortgage, some mortgage monthly payments do not include taxes and insurance, making the monthly payment lower, however, the borrower has to pay the taxes and insurance on their own.
Mortgage Payment Example
In our example we will assume we are buying a home valued at $500,000. We will be taking a 30-year-fixed rate mortgage of 4.125% interest rate with a loan amount of $375,000 making our down payment 25%. The amortization schedule will consist of 360 payments.
We will be calculating for M (Monthly mortgage payment):