Understanding the components that make up a mortgage payment can help you choose the mortgage option that is best for you.
There are seven costs generally reflected in your monthly mortgage payment: principal, interest, escrow, taxes, homeowners insurance, mortgage insurance, and homeowners association or condominium fees. Let's take a closer look at each.
1
Principal
Principal is the amount of money you borrowed to buy your house, or the amount of the loan that you have not yet repaid.
Keep in mind, the more money you pay up front in your down payment, the less you will have to borrow.
The amount of money you can borrow is based on a variety of factors, including your monthly income and payments such as car loans and student loans. Use our mortgage affordability calculator to estimate how much you may be able to qualify for.
2
Interest
Interest is the cost you pay to borrow money from your lender, and it usually appears as a percentage of the amount you borrowed.
Interest rates are set by your lender based on many factors, some that you can control and some that you can't. Out of those that you can control, one of the most important factors is your credit score. A higher credit score could help you get a lower interest rate.
Learn more about interest and getting the best possible rate for you.
3
Escrow
Required by many lenders under the terms of your mortgage, an escrow account is a reserve set aside to pay for a portion of your annual costs for property taxes and insurance premiums, such as homeowners insurance.
Your escrow payment goes to your lender, who deposits the money into an escrow account. The lender uses the money in the escrow account to pay for your property taxes and insurance premiums on your behalf when they are due.
Regularly scheduled escrow payments are a good option for many homeowners because they eliminate the surprise of a large annual payment for those expenses.
4
Taxes
Your mortgage payment will typically include one-twelfth of the estimated annual real estate taxes, also known as property taxes, on the home you purchased.
These payments are put into an escrow account, and the lender will use the funds to pay your property taxes on your behalf when they are due.
5
Homeowners Insurance
Homeowners insurance protects both you and your lender from fire or flood, which damages the structure of the house. It also protects from a liability, such as an injury to a visitor to your home, in addition to damage to your personal property, such as your furniture, clothes or appliances.
Your mortgage payment will usually include one-twelfth of your annual homeowners insurance premium that will be put into an escrow account.
Just like your taxes, when your insurance is due, your lender will use the money from that account to pay your homeowners insurance on your behalf.
6
Mortgage Insurance
If your down payment is less than 20%, you will have to purchase private mortgage insurance, an added insurance policy that protects the lender if you are unable to pay your mortgage.
As with your taxes and homeowners insurance, one-twelfth of your annual mortgage insurance premium is included in your monthly payment and put into your escrow account. Your lender will use these funds to pay for your insurance on your behalf when it is due.
7
Homeowners Association Fees or Condominium Fees
Most neighborhoods and all condominiums have a homeowners association (HOA). HOAs provide services such as maintaining common areas, managing trash and snow removal, and help enforce rules set by the neighborhood or condominium developer.
To cover these costs, you need to pay a regular fee to your HOA.
For information about buying a home and the mortgage process, visit My Home by Freddie Mac®.
