What Goes Into a Monthly Mortgage Payment

There are so many pieces that go in to establishing a monthly mortgage payment. It’s more than just “paying back the loan!”

1. Principal: This is the amount you actually borrowed, and each month, a portion of your payment chips away at this balance. The principal payment is very small at first, and it grows throughout the life of the loan. This is why when you buy a home and then sell it quickly (within the first 2 to 5 years), you might not make a lot of money (unless there was a lot of appreciation.)
2. Interest: This is the cost of borrowing money, which is based on your interest rate, remaining loan balance, and loan type (fixed or adjustable).
3. Property taxes: Local governments collect these, usually twice a year in Indiana. But lenders often divide them in to monthly installments and hold the money in your escrow account.
4. Homeowners insurance: Lenders require this. Like taxes, many lenders collect this monthly and escrow it, as well.
5. Mortgage insurance (sometimes), aka PMI (conventional loans) or MIP (FHA loans.) This protects the lender and can often be removed once equity grows.

Other things that can affect your payment:

1. Interest rate changes
2. Size of your down payment
3. Property tax increases (very common, by the way!)
4. Insurance increases (happening very often these days!)
5. Escrow adjustments
6. Credit score

Let’s walk through an example with rough numbers (definitely not exact):

• Purchase price: $350,000
• Down payment 5%: $17,500
• Loan amount: $332,500
• Loan type: 30 year fixed
• Estimated rate: 6.75%
• Monthly loan repayment (principal & interest): $2,155/month …but there’s more to it than that…
• Property taxes: $3,500 annually, $292/mo (This is probably high, but we do have a state cap of 1%)
• Homeowners insurance: $1,800 annually, $150/mo
• PMI (because only 5% down): Estimated $165/mo

Estimated monthly payment = $2,760

Wisdom you should have:

1. Every 0.5% of interest rate change equals about +/- $100/month (So if you’re waiting for a 1% rate drop, you’re waiting for a savings of $200/mo.)
2. 10% down instead of 5% down save you about $200­–$250/month
3. Removing PMI later saves you $165/month

So, what do you think? Ready to jump in!? Like we often say, the best time to buy is exactly what you’re ready to buy.