For those who rented a home or apartment previously, the concept of making a monthly payment is a familiar one. However, as a homeowner making a monthly mortgage payment, your money won’t be going into your landlord’s pocket. Instead, your one monthly payment will help you cover a variety of things and help you earn equity in your home. This is a huge benefit of buying instead of renting!
At Maple Tree Funding, we make it easy to understand exactly what you are paying for every time you make a mortgage payment. Read on to find out what’s covered every time you make a monthly payment on your home.
Buying a house is an exciting milestone in life, but it also comes with a new financial responsibility – making monthly mortgage payments. When you take out a mortgage loan to purchase a home, your monthly payment covers more than just paying back the amount you borrowed. Let’s break down the typical components of a monthly mortgage payment for first-time homebuyers.
Principal and Interest
The main portion of your payment goes toward the mortgage principal – the amount you borrowed to buy the house – and interest on the loan,
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Principal – This reduces the amount you owe on the mortgage. Each month, more of your payment goes toward principal as you pay down the loan.
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Interest – The cost of borrowing money from the lender Interest is calculated as a percentage of your outstanding principal balance
For example, on a $200,000 loan at 4% interest over 30 years, your initial monthly principal and interest payment would be about $955. In the early years, most of that goes to interest. Over time, more goes to reducing principal as the balance decreases.
Property Taxes
Homeowners must pay annual property taxes that help fund local schools, infrastructure, and services. There are a couple ways to pay them:
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Monthly escrow – Part of your mortgage payment goes into an escrow account that pays your property taxes when they are due.
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Pay annually or bi-annually on your own.
Property taxes are based on the assessed value of your home and local tax rates. For a $250,000 home in an area with a 1.5% tax rate, annual property taxes would be around $3,750 or $313 per month.
Homeowners Insurance
Lenders require home insurance to protect from losses like fire, storms, flooding, and theft. Like taxes, there are two ways to pay:
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Monthly escrow – Part of each mortgage payment contributes to an escrow account that pays your insurance premiums.
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Pay annually on your own.
Rates vary significantly based on factors like location, amount of coverage, and deductible. Expect to budget around $100-$200 per month for homeowners insurance.
Mortgage Insurance
If your down payment is less than 20% of the purchase price, you’ll likely have to pay private mortgage insurance (PMI). PMI protects the lender if you default, but doesn’t benefit you as the borrower.
PMI is usually between 0.5-1% of the total loan amount per year. On a $200,000 loan with 5% down, PMI might be $100/month. You can request to cancel PMI once you reach 20% equity in the home.
HOA Fees
Homeowners associations (HOAs) are common in condos and planned communities. HOA fees pay for amenities and upkeep of common areas. Expect to budget $100-$300 per month in HOA dues depending on the neighborhood.
The Total Monthly Payment
Adding up principal, interest, taxes, insurance, PMI, and HOA fees provides an estimate of your total monthly housing costs.
For example, on a $200,000 home:
- Principal & Interest – $955
- Property Taxes – $313
- Homeowners Insurance – $125
- PMI – $100
- HOA Fees – $200
Total Monthly Payment = $1,693
This does not include utilities and maintenance costs. When budgeting to buy a home, make sure to account for all ownership costs, not just the mortgage.
Tips for First-Time Homebuyers
Preparing for monthly mortgage payments and other costs is critical for first-time homebuyers. Here are a few tips:
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Get pre-approved – This shows sellers you are serious and can give you bargaining power. Shop mortgage rates and make sure you understand all costs.
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Calculate your entire monthly housing budget – Make sure it fits comfortably within your income, accounting for taxes, insurance, maintenance, utilities, and other costs.
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Prioritize down payment savings – Put down at least 20% if possible to avoid PMI and get better rates.
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Pick the right loan term – Opt for a 15-year fixed rate mortgage to pay off your home faster and save on interest costs.
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Understand your escrow options – Using a lender’s escrow account makes budgeting easier.
The keys are understanding exactly what your monthly mortgage payment covers, budgeting for all ownership costs, and picking loan terms and down payments that fit your financial situation. With the right preparation, you can make smart choices when buying your first home.
Understanding Your Monthly Mortgage Payment
Wondering what exactly you are covering in the payments you make each month? Here is a breakdown of what’s included in the one easy payment you make each month.
The principal is the amount of money in your monthly payment that goes towards the actual cost of the home you purchased. In other words, it’s the amount you pay back to the lender each month.
Each time you contribute to the principal, the equity in your home increases and the principal amount you owe decreases.
If you are borrowing money from a lending institution to purchase your home, you will have to pay interest on the loan. Interest is a percentage of the loan amount paid to the lender over time in exchange for the use of the money they lent.
When you are first starting your mortgage payments, most of your mortgage payment will go towards paying down the interest on the loan. Over time, this will shift and you will begin paying more towards the principal portion of your mortgage, though your monthly payment amount will not change.
You can learn more about how interest rates impact home buying and mortgage payments here.
Property & School Taxes
As a property owner, you’ll be responsible for paying property and school taxes. If you’d been renting previously, this will likely be new for you.
Luckily, for many first time homebuyers, Escrow makes paying your annual taxes easy! With Escrow, a portion of your monthly mortgage payment is set aside to be used for covering the taxes on your new home. By incorporating tax payments right into your monthly mortgage payment, you won’t have to worry about saving to cover your school and property taxes.
If you’re like many first time homebuyers, who put less than 20% down on your home when you purchased it, your mortgage program will require you to pay mortgage insurance. Mortgage insurance, or PMI, protects lenders in case you default on your loan and are unable to pay it back. It is typically required for loans with low down payments.
The good news is that your mortgage insurance payment is not something extra you’ll have to worry about. It is completely covered as part of your monthly mortgage payment.
Your home is likely one of the most significant purchases you’ll make in your life. As a result, it’s incredibly important to protect it with a homeowners insurance policy.
As a new homeowner, you’ll want to research your options to decide the provider and policy that works best for you. If you are participating in Escrow, once you’ve selected a provider and policy you won’t have to worry about making a monthly payment. A portion of your monthly mortgage payment will automatically go towards covering your homeowner’s insurance payment.
Is It Worth Waiting To Pay Cash For A House?
FAQ
What are monthly payments on a house?
Remember, your monthly house payment includes more than just repaying the amount you borrowed to purchase the home. The “principal” is the amount you borrowed and have to pay back (the loan itself), and the interest is the amount the lender charges for lending you the money.
What bills do you have to pay when you own a house?
Beyond monthly mortgage payments, it costs money to pay for electricity, heating, and water, and homeowners have to be prepared for unexpected expenses, such as replacing a roof. Yard care is also an expense, and if you live in a condominium or gated community, you will likely have HOA fees as well.
How much house is $1400 a month?
$1,400 per month qualifies to borrow a loan amount of $204,913; add your $20,000 down payment to this, and you can purchase a home of $224,913. Of course, you’ll still need cash for reserves and to cover the loan’s closing costs.
Can I afford a $300 k house on a $70 k salary?
Can I afford a $300K house on a $70K salary? If you have minimal debts then a $70,000 salary might be enough to afford a $300,000 house. The size of your down payment and your mortgage interest rate will be important variables. Try to keep your monthly house payments below a third of your monthly gross income.