What Makes Up a Mortgage?

I’m sure that everyone has heard of a mortgage. But how many people really know what a mortgage really is and what consists of? Well, here is some information that will be very helpful for those thinking about buying a home.

A mortgage is made up of 4 parts: Principal, Interest, Taxes, and Insurance (or PITI for short). Let’s look at each of these factors.

First, there is the principal. The principal is the actual amount borrowed to purchase the home. Say you are buying a home and it costs $100,000 and you have $3,000 in your savings for the down payment. You will need to borrow only $97,000 from the bank. That is your principal amount.

Second, we have an interest. The interest that you pay is based on a percentage of the principal – what you must payback. Interest rates vary and generally range between 3-5% based on credit. Most prefer a fixed interest rate.

The third factor that makes up a mortgage is property taxes. Whether you financed your home with a lender or paid cash for it, you are still responsible for the property taxes. Property taxes are billed bi-yearly, however, paying them monthly (in your mortgage) helps with the burden of paying a large lump sum every six months.

Lastly, there is your homeowner’s insurance. Every homeowner needs homeowners’ insurance. It protects them and their property from any unexpected event that should come up pertaining to the home. Meaning, if there was a fire or flood, the homeowner would not have to come out of pocket to pay for the repairs or to rebuild the home. The insurance company will take care of it and even pay for you to stay somewhere while the work is being done if necessary.

The four factors stated above are the main factors to a mortgage, but there are a few others as well. For instance, most mortgage companies will require you to have Private Mortgage Insurance (PMI). This insurance protects the mortgage company in the event that the homeowner can no longer make the monthly mortgage payment. There is also something called Homeowners Association Fees. These fees apply to

Those that live in private communities like condos, townhomes, and gated communities. Now that you are aware of the factors of a mortgage, you can be more confident when looking for your new home and calculating what your new monthly mortgage will be.