The mortgage payment amount depends on how much is borrowed, the interest rate being charged, and for how long. The longer the term of the loan, the lower the payment. This is why 30 year mortgages are more popular. If a borrower wants to pay off sooner, they can either get a shorter term or pay more toward principle of the loan.
Many first time buyers do not understand this so this is a simple explanation if they ask. Always let them know they should ask their lender for specifics.
The principal is the balance of loan. For a fixed loan, the mortgage payment will remain the same for the principal and interest, but the amount toward principal will increase and interest will decrease. In early years, the payment will includes more interest than principal.
Housing expenses that will change over the life of the loan will be taxes and home owners insurance. The buyers housing budget needs to account for the home owners association fees and repairs and maintenance. It is suggested to have an emergency fund for these expenses.
- Balance of the loan
- Amount pays down the loan
- Fixed rate loan – payment will not change but the amount toward principal will increase and interest rate decreases
- In early years, payment includes more interest than principal
- INTEREST -Cost of borrowing money
- TAXES – Escrow account collects 1/12th of the yearly taxes so it can be paid by the servicing company when taxes are due
OTHER HOUSING EXPENSES
Home Owners Association Fees – not part of your mortgage payment but taken into consideration of your debt to income ratios
Repairs and Maintenance – All homeowners should budget for home repairs and maintenance. It is suggested to have an emergency fund for these expenses
HOW IT IS CALCULATED
PRINCIPLE (X) INTEREST = TOTAL INTEREST FOR YEAR/12, MONTHLY INTEREST CHARGE
PAYMENT (– ) MONTHLY INTEREST CHARGE = MONTHLY PRINCIPLE PAYOFF
TOTAL PRINCIPLE (–) MONTHLY PRINCIPLE PAYOFF = NEW PRINCIPLE BALANCE
The interest is the cost of borrowing money. The amount of interest that is charged is multiplied by the balance owed and then divided by 12. So if you owe $100,000 and the interest is 5% the interest charge for a year will be $5000. You would then divide the $5000 by 12 months. So for this example the interest portion would be $417.67 and the rest of the payment would go toward the principal.
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