Becoming homeowner is an exciting accomplishment for those making the transition from renter to owner. It’s an opportunity to provide a roof over your family’s head, a chance to make new memories and to create a space that is uniquely yours. One of the biggest concerns about making the transition from renter to owner is how your monthly mortgage payment compares to your current rent.
Did you know, there’s a formula that determines what your monthly payment will look like once you purchase your home? If you haven’t started your homeownership journey yet and are interested in learning how lenders determine your monthly payment, we’re breaking it down below.
PITI: Mortgage Payment Components
There are four factors that play a role in the calculation of a mortgage payment: principal, interest, taxes, and insurance (PITI).
- Principal: A portion of each mortgage payment is dedicated to repayment of the principal balance. Loans are structured so the amount of principal returned to the borrower starts out low and increases with each mortgage payment. The payments in the first years of your loan are applied more to interest than principal, while in the final years, payments are applied more to the principal.
- Interest: Interest is the cost for borrowing money from a lender. The interest rate on your mortgage affects the size of your monthly mortgage payment: Higher interest rates mean higher mortgage payments.
- Taxes: Real estate or property taxes are calculated by the government annually based on the appraised value of your property. If your loan program allows for it, you may elect to make one lump sum payment every year. Otherwise, your taxes become part of your monthly payment and are into an escrow account. The amount due is divided by the total number of monthly mortgage payments in a given year.
- Insurance: Like real-estate taxes, insurance payments are made with each mortgage payment and held in escrow until the bill is due. There are two types of insurance coverage that may be included in a mortgage payment. One is property insurance, which protects the home and its contents from fire, theft, and other disasters. The other is private mortgage insurance or ‘PMI’ (needed if the home is purchased with a down payment of less than 20% of the cost). This type of insurance protects the lender in the event the borrower is unable to repay the loan.
Monthly Payment Calculator
At PrimeLending, we know how important it is to educate our borrowers and offer assistance in all stages of the homebuying process. That’s why we’re making it as easy as possible for you to see what your potential monthly payment might look like. If you’re interested in getting down to the numbers, our monthly payment calculator can help.
Become a Homeowner
Our team is ready and willing to help guide you through the loan process, answer your questions and help you find the right loan to fit your needs. If you’re ready to start your homebuying journey, find a loan officer in your area now.