Morgage Payment Comprises Four Basic Costs

2007-03-08 10:33:40

( Technology )



Your monthly morgage payment is determined using a fairly complex formula. Mortgage lenders use comprehensive payment tables to determine monthly morgage payments. If you’re still planning to take out a loan, you can determine your monthly morgage payments through websites that have morgage payment calculators.

There are actually four costs (combined into one payment to make check-writing convenient) associated with monthly morgage payments. These are the principal, interest, tax and insurance.

Principal

The principal is the amount of money you actually borrowed. As you pay your monthly morgage payments, the loan balance will decrease.

Interest

Morgage interest rate refers to a certain percentage that your lender charges each year the debt is outstanding. The amount of interest due on any payment date is calculated by figuring total yearly interest based on the unpaid balance and dividing that figure by the number of payments made each year. Although, your monthly morgage payment represents repayment of the loan and interest, for most of the life of the loan a greater part of your monthly payment goes to interest.

Taxes

Property taxes are levied to fund schools, law enforcement, and other local services. The level of property taxes differs from one community to another. Individual property taxes also vary according to the assessed value of real estate. Thus, the more expensive your home is, the higher its property taxes.

Insurance

Homeowner’s insurance is the other component of your monthly morgage payment. Its cost varies with some factors (the age of the home, location, materials used in construction, and geographic area). Mortgage lenders require homeowner’s insurance that covers the replacement of your home and its contents.

The part of your monthly morgage payment that goes for taxes and insurance is paid into an escrow account, where it accumulates until your lender pays property taxes and homeowner insurance premiums as due.


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