When you get a mortgage to purchase a home, you make a single payment each month to repay it. But many times, more than just the amount you owe the lender is incorporated in the payment. Understanding what’s included can help you budget appropriately, so you don’t borrow more than you can afford. Here are some common expenses that can be rolled into your monthly mortgage payment.
- Principal. This is the amount of money you borrow from the lender to purchase a home. For example, if the house you are buying is $500,000 and you have $50,000 saved up for your down payment, you’d need to borrow $450,000 to complete the purchase. That $450,000 is the principal amount of the loan.
- Interest. This is what your lender charges you to borrow money. The higher your interest rate, the larger your monthly payment will be and the more you will pay over the life of the loan.
- Property taxes. An escrow account is an account managed by your mortgage lender or servicer that holds money for your property taxes and homeowner’s insurance. If your lender or servicer requires you to have an escrow account or you choose to open one, your monthly mortgage payment will include money to pay your property taxes when they’re due.
- Homeowners insurance. If you have an escrow account, you’ll also contribute money toward your homeowner’s insurance every month. When your insurance premium is due, your mortgage lender or servicer will make the payment for you using money from your escrow account.
- Private mortgage insurance (PMI). For most types of mortgages, lenders require you to pay PMI If you put less than 20% down when you purchase a home. PMI will be included in your monthly payment until the loan-to-value ratio (LTV) of your mortgage reaches 78%.
*HOA fees. This one is not included in the payment you send to your lender or servicer each month, but if your community has an active homeowner’s association, it’s a fee you should be prepared to pay. HOA fees vary widely based on the amenities and services you receive and may increase or decrease over time based on the HOA’s annual budget.