Just What Is Crammed Into Your Mortgage Payment?

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Estimated mortgage payments listed on popular websites can be very misleading. Mortgage payments consist of a lot more than just principal and interest.

 

 

Spring is finally here, and along with the cherry blossoms come house fever. Real estate agents are ramping up for their busy season and people young and old are starting to swoon over Zillow listings.

 

“Honey, look at this! The mortgage payment is less than our rent!” Have you ever heard that? Or have you ever said that?

 

Estimated mortgage payments listed on websites like zillow.com can be very misleading. Usually, they only include part of the picture. In reality, there is a lot more that goes into a mortgage payment than just the principal and interest. Called “PITI” in the industry, this is what comprises the typical mortgage payment:

 

Principal

The principal is what you actually borrow to buy your house. There are a lot of fees (closing costs) involved in taking out a mortgage, and sometimes they can be rolled into the principal. If you do this, then your principal will start higher than the amount you borrowed.

 

Interest

Interest is the cost of borrowing money. When you rent a car, you pay a fee for the privilege. It’s the same when you “rent” money to buy a house. Interest is calculated as a percentage of the principal that you borrowed. As the principal goes down, so will the dollar amount you pay in interest. Your payment won’t go down, though. More of the money will just go towards paying down the principal.

 

Taxes

Yes, you have to pay property taxes on your home. This is how your local schools and fire departments and many other things are funded. Taxes are usually paid twice a year, but money is paid into your escrow account monthly to cover them. Rates vary depending on the city and county where the home is located, so this is something to consider when looking for a house.

 

Insurance

There can be several different kinds of insurance paid through your escrow account. Money is set aside monthly to fund the premium payments when they come due.

 

Homeowner’s/Hazard Insurance

Homeowner’s insurance protects your home (and you) against loss or damage. If you have a mortgage, your lender will require that you have homeowner’s insurance, though you get to choose your provider. My homeowner’s insurance reimbursed me for the cost of my computer and jewelry when they were stolen from my home. My neighbor’s house flooded from bad plumbing and his insurance paid for all of the repairs.

 

Private Mortgage Insurance (PMI)

People often wonder why they need PMI if they have hazard insurance. Hazard insurance is to protect you. PMI is to protect your mortgage lender from you. Usually, you are required to have PMI if you owe more than 80% of your home’s value. It protects the lender in case your home drops in value, you stop paying, and they have to foreclose. They don’t want to end up with a house that isn’t worth as much as the debt owed on it.

 

That’s exactly what happened after the housing bubble burst. Home values dropped so low that, even with PMI, many lenders suffered great losses when borrowers defaulted and they had to foreclose.

 

Mortgage Insurance Premium (MIP)

MIP is basically PMI for FHA loans. It works the same way.

 

So, Zillow Is Lying To Me?

Picture of online house listing with estimated mortgage payment

They aren’t really lying, just not telling the whole truth. When Zillow says that the mortgage payment on a home will be $1,291, that’s not really what you’ll be paying. That’s just the principal and interest portion, calculated using an interest rate that you may not be able to get with a down payment that you may not have.

 

The home in the picture also comes with a $3,194 annual tax bill. That’s another $266 a month. If your homeowner’s insurance is $1,000 a year, that’s another $83 a month. Your $1,291 mortgage just grew to $1,640, and that’s without PMI.

 

If you’re looking to buy a home, make sure to take all of these expenses into consideration. You don’t want to fall in love with a house you can’t afford or end up with a mortgage payment that will break you. (You can check out redfin.com for a more accurate mortgage estimate on your dream home.)

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