Whether they're real estate professionals by trade or don't know an ARM loan from a balloon mortgage, most modern homeowners take a relatively casual approach to paying their mortgages. At this point, the majority of the country's borrowers make their monthly mortgage outlays by automatic debit. In other words, they enjoy 30 or 31 days of peace between the violent bouts of regret that accompany those monthly transfers to their mortgage lenders.
It's worth remembering that mortgage payments aren't homogeneous outlays. When your bank forwards hundreds or thousands of dollars of your hard-earned money to your mortgage lender, that money doesn't simply drop into a cavernous space in which your lenders' employees roll around from time to time. In fact, your mortgage payment consists of four distinct parts that must be divided among three discrete parties.
Principal and Interest
You're probably aware that your lender uses part of your mortgage payment to pay down the original balance on your loan. Known as the "principal," this comprises a steadily increasing chunk of your payment. In fact, it fluctuates in direct proportion to the amount of interest that you're required to pay on your loan.
Initially, the balance between your principal and interest payments will be weighted heavily in favor of the latter. As time goes on, the interest portion of your payment will shrink down to almost nothing, and you'll be left to pay off your remaining principal balance in short order. By keeping your loan's principal intact for as long as possible, this arrangement maximizes your lender's earnings.
The third component of your monthly mortgage payment can fluctuate wildly depending on the assessed value of your home and the mill rate in your local jurisdiction. Since both of these values can change over time, it's important that you keep close tabs on your home's assessed value as well as your local tax policy. You can also find your exact monthly property tax outlay on the statements that your lender is legally required to provide to you. If something seems "off," don't be afraid to contact your local taxing authority.
The fourth component of your monthly mortgage payment consists of the premium-covering installment payments that you're required to make to your homeowner's insurance company. In most jurisdictions, homeowners who
haven't yet paid off their mortgages are required to carry adequate homeowner's insurance coverage.
Homeowner's insurance can cost a pretty penny for folks who live in flood-prone, fire-prone or high-crime areas. What's more, many sub-prime borrowers are required to carry supplemental mortgage insurance to cover their supposed risk of default. If you find yourself in one of these special situations, your insurance outlays could eat up a significant chunk of your monthly payment.
Affording Your Mortgage
If you're already making payments on your mortgage, it may be too late for you to alter your monthly payment structure without submitting to a time-consuming refinancing process. However, there are a few payment-reducing tricks that you can keep in mind before taking out a new home loan.
For starters, you can easily reduce the long-term cost of your mortgage by increasing the size of your down payment. This will lower the all-important loan-to-value ratio that measures the relationship between the size of your mortgage and the total value of your home. Lower loan-to-value ratios generally result in lower monthly payments and more manageable interest rates. As a rule of thumb, try to make a down payment equal to at least 20 percent of your home's value .
You can also take steps to reduce your debt-to-income ratio. You've probably heard that mortgage lenders are uneasy about lending to people whose housing costs account for more than one-third of their incomes. They're even more wary about lending to people whose consumer debts take up more than 5 percent of their earnings. While debt-ridden borrowers can still obtain mortgages, they often come with higher interest rates and more restrictive terms. If you can keep your total debt to less than 38 percent of your income. you'll enjoy a lower rate on your mortgage.
Keep Your Mortgage in Perspective
Making a mortgage payment is enough to ruin anyone's day. Lest you harbor an inordinate amount of ill will towards your mortgage lender for this alleged robbery, remember that your mortgage payment is made up of four separate elements that end up in the hands of three different parties. In other words, don't forget to invite your homeowner's insurance company and the local tax man or woman to your pity party.
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