Buying a home is one of the most exciting moments you’ll ever experience. It will also require you to familiarize yourself with the mortgage process – especially the part that obligates you to make monthly payments for the next 15, 20 or 30 years.
When you make a mortgage payment, your money is going toward four different costs: principal, interest, taxes, and insurance. Let’s detail each so you know just what you’re paying for.
Principal
Your principal is the amount you owe to your lender. When you begin paying your mortgage, a relatively low percentage of your payments will go toward lowering your principal balance. As your principal gradually decreases, the amount of your payment that goes toward it increases. If you have a 30-year mortgage, then the majority of your mortgage payment will go directly toward paying down your principal within about 18 to 20 years.
Interest
Your lender has an interest in providing you with a home loan. It is quite literally called “interest” – the primary cost of borrowing money. Your lender will charge you interest every month. Although the amount of your payment will not change, a lower percentage of it will go toward interest with each month that passes.
The amount of interest you pay depends on several factors. One of these is whether your mortgage has a fixed rate or adjustable rate. If it is fixed, then you will pay the same interest rate throughout the duration of your mortgage term. If it is adjustable, then your rate may change every six to 12 months (beginning at some preestablished date in the future; often three to 10 years down the line).
Want a more favorable interest rate than your mortgage currently offers? Consider refinancing, which effectively replaces your old mortgage with a new one.
Taxes
Your lender will not charge you taxes. The government will, however, as taxation is one of its chief priorities.
In some cases, a borrower is able to pay property taxes directly to the government. But in most cases, the lender estimates the borrower’s annual tax liability and includes it as part of each mortgage payment. The lender will set aside this money until property taxes are due, at which point it will pay on the borrower’s behalf.
Insurance
If your down payment is less than 20% of your home’s purchase price, then your lender will almost certainly require you to pay mortgage insurance. It covers the lender in the event that you stop paying off your mortgage, for any reason. It may be possible to stop paying for mortgage insurance once you have paid down around 80% of your principal.
Taking out a mortgage will also require you to purchase homeowners insurance. You may or may not have the option of rolling your premium into your mortgage payment. If you believe doing so would make your life easier, make sure to ask your insurance agent whether it is an option.
Sherburne State Bank is standing by to make homeownership possible throughout the great state of Minnesota. Before you begin shopping for houses, contact us or visit one of our locations in Becker, Monticello or Princeton, MN to speak with one of our agents. We offer conventional, VA, FHA and USDA mortgages that can fit anyone’s budget and homeownership goals!
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