As a homeowner with a mortgage, it’s important to understand how the principal amount, as well as the interest, insurance requirements, and property taxes contribute to your overall mortgage payment. It’s also vital to be aware that the FBI says your home is already a target for home title fraud. DomiDocs HomeLock™ is the only proactive protection on the market – early detection of mortgage and home title fraud is the best defense for keeping your property and its equity safe!
What’s a Mortgage?
A mortgage is a long-term loan from a bank or other financial institution that helps a borrower purchase a home. The collateral for the mortgage is the home itself, meaning that if the borrower doesn’t make monthly payments to the lender and defaults on the loan, the bank can sell the home and recoup its money. The size and term of your loan are the main factors in calculating your mortgage payments.
Amortization
Amortization is the process of paying off debt with regular payments made over time. The fixed payments cover both the principal and the interest on the account, with the interest charges becoming smaller and smaller over the payment schedule. A chart by Investopedia shows an example of how amortization works based on a $100,000 30-year mortgage with a monthly payment of $599.55.
| Payment | Principal | Interest | Principal Balance |
| 1 | $99.55 | $500.00 | $99,900.45 |
| 12 | $105.16 | $494.39 | $98,772.00 |
| 180 | $243.09 | $356.46 | $71,048.96 |
| 360 | $597.00 | $2.99 | $0.00 |
PITI Mortgage Payment Structure
A mortgage payment consists of a dedicated amount to repay the principal balance plus interest, taxes, and insurance premiums (PITI) to be held in escrow.
- Principal: The principal is the amount due on any debt before interest or the amount invested before returns. All loans start as principal, and for every designated period that the principal remains unpaid in full, the loan will accrue interest and other fees.
- Interest: In relation to a mortgage, interest is the cost of borrowing funds to purchase a property. The interest charged is calculated at a specific percentage rate for the full amount of the mortgage loan issued by the lender. Mortgage interest can be calculated as a fixed rate that remains the same for the life of the loan, or a variable rate meaning it will fluctuate with the financial markets. During the early years of a mortgage, the majority of your payments will go toward the mortgage interest. As a taxpayer and a homeowner, you may be able to claim a limited amount of mortgage interest as a tax deduction.
- Taxes: Property taxes are assessed by municipal governments to finance infrastructures such as policing, fire departments, and schools. They are a form of taxation on what is termed personal property. Personal property is defined as any movable property that is not attached to a home or building.
- Insurance: Mortgage insurance is a product that ensures a mortgage in case the borrower defaults. Homeowners who pay a down payment of less than 20 percent are required to pay private mortgage insurance (PMI); however, once your mortgage balance reaches 78% of its original amount, you may be able to cancel the insurance.
As a homeowner, you can also opt for a mortgage that doesn’t include insurance or taxes as part of the payment structure, however, while you’ll have a lower monthly payment overall, you’ll need to come up with enough funds to pay the insurance and taxes owed annually on your own. Including these expenses in the actual mortgage payment itself makes for less of a financial burden.
Why is Your Mortgage Payment Being Adjusted?
It’s important to understand that the amount of your initial mortgage is an estimation calculated by the lender so there could be some fluctuation from the onset. Other factors that could see your mortgage payment being adjusted could include:
- an increase in property taxes where your mortgage payment will be adjusted to incorporate the additional expense
- higher interest rates as per a variable-rate mortgage – if the financial markets dictate high loan rates, the expense will be directly reflected in your mortgage payment
- renovations to your home as its assessed value may increase resulting in higher taxes
- the general economy – if it’s doing well, home values and property taxes will increase or can decrease if it isn’t as strong
- if your municipality requires more funding for public services, your taxes may increase
- in most states, a homestead tax exemption or discount offers tax relief on part of your home’s value from property taxes but you’ll need to apply for this benefit and it’s solely applicable to primary residences
- mortgage insurance costs being higher than estimated based on the deductible and provider you choose to use
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