by The Nerd
If you are like many homeowners, you have a mortgage loan. You make payments on this loan on a monthly or biweekly basis. You may notice some occasional fluctuations in your mortgage payments. If so, they are likely the result of changes that have been made to one of the components of your mortgage payment.
If you are scratching your head at this point and wondering just what your mortgage payment consists of, you are not alone. Many mortgage holders assume that their monthly mortgage payment is simply put toward paying down the principle of the original loan along with the interest. This may not be the case. In fact, it is unlikely that your mortgage payment is made up of only two components. Read on to find out what your mortgage bill probably consists of.
The principal of the loan
The largest part of your loan may be paying down the principal of the loan. The principal of the loan is the amount of money that you originally borrowed to buy your home. If you originally borrowed USD $430,000, then this amount is referred to as the principal of the loan.
The interest of the loan
The financial institution that lent you the money to buy your home did not do so because they like you, or because they will only be happy when everyone owns a home. No, they gave you a mortgage because you are going to pay them to do so – as interest. It is to be hoped that you negotiated a low mortgage rate at a time when the economy was conducive to doing
The escrow payment
You may have an arrangement with your financial institution where they manage an escrow account – basically, an account managed by a third party – from which your property taxes, home insurance and, potentially, hazard insurance are paid. You pay into the escrow account each month – as a component of your mortgage payment – and the financial institution pays the firms that have sold you insurance and the government agency that collects your taxes. See Mortgage Interest Deduction .
Applicable late fees
If you have skipped a mortgage payment, your financial institution will likely charge you a late fee for doing so. The specific fees and the triggers that release them will be explained in detail in the mortgage agreement that you signed.
Another possible charge you may notice on your monthly mortgage statement. Depending on the type of loan you have (FHA, VA, Conventional) you may be obligated to pay monthly mortgage insurance.
These three components – the loan principal, the loan interest, and the escrow payment make up the typical mortgage payment. If you see a sudden rise in your monthly mortgage payment, it may be that your property taxes have been increased. Or that there has been a change made to your insurance agreement.
If you have any questions about how your mortgage payment is constructed it is best to speak to a representative at the financial institution that you deal with. Doing research on the Internet can provide you with much relevant and accurate information, but your individual mortgage payment can be explained best by the bank who holds it.