Understanding your property is an important step to being a responsible homeowner. This helps you…
Many property owners purchase their new home using a loan called a mortgage. Using a mortgage, an individual is able to get a loan for a home purchase, normally financed over 15 or 30 years. Every month, the borrower makes a mortgage payment to their lender. But what exactly makes up that payment each month?
Principal and Interest
The bulk of the monthly mortgage payment is made up of the principal and interest owed on the loan. When securing a mortgage, the borrower agrees to pay a certain percentage on an amount of money that the lender agrees to let them use to make the purchase. The borrower is then on the hook to pay some amount towards the principal balance of the loan and some amount towards the additional interest they owe. As they continue to pay the mortgage, the amount going towards principal increases while the amount that goes towards interest decreases. Following the plan outlined, called an amortization schedule, the principal and all interest will be paid in full at the end of the loan term.
The lender also takes care of property taxes for the homeowner. Sounds great, right? The cost of taxes based on the area that the home is located is then rolled into the monthly mortgage payment. Part of that monthly payment goes to paying those taxes on behalf of the homeowner. Once the loan is paid in full, the responsibility for paying property taxes becomes the homeowner’s.
Homeowner’s insurance is one of the most important things that a homeowner can have to ensure the safety and security of their home. As the financing behind the purchase, the lender wants to make sure that they are covered in the event of an emergency. Arranging homeowner’s insurance is almost always a requirement by the lender before closing on a home. The buyer sets up the policy based on the needs of the property (value, flood zones, and other factors), then pays the premiums to the mortgage company as part of their monthly payment.