Understanding Your Mortgage Payment
Components of a Mortgage Payment (PITI)
Your monthly mortgage payment consists of four main components, commonly referred to as PITI:
- Principal: The amount that goes toward paying down your loan balance
- Interest: The cost of borrowing money from the lender
- Taxes: Property taxes collected and held in escrow
- Insurance: Homeowners insurance (and PMI if applicable)
Types of Mortgage Loans
Conventional Loans
Not insured by the federal government. Typically require 5-20% down payment. Best rates available with 20%+ down payment and good credit (740+).
FHA Loans
Federal Housing Administration insured loans. Down payment as low as 3.5%. Lower credit score requirements (580+). MIP (mortgage insurance premium) required for life of loan if down payment < 10%.
VA Loans
For eligible veterans and active military. No down payment required. No PMI. Lower interest rates. One-time funding fee (can be financed into loan).
USDA Loans
For rural and suburban homebuyers. No down payment required. Income limits apply. Property must be in eligible rural area.
Fixed-Rate vs Adjustable-Rate Mortgages
| Aspect | Fixed-Rate | Adjustable-Rate (ARM) |
|---|---|---|
| Interest Rate | Stays the same | Changes after initial period |
| Payment Stability | Predictable | Can fluctuate |
| Initial Rate | Higher | Lower (typically 0.5-1% less) |
| Best For | Long-term homeowners | Short-term ownership (<7 years) |
Loan Term Comparison: 15-Year vs 30-Year
Example: $300,000 loan at 7% interest
| Term | Monthly Payment | Total Interest | Total Paid |
|---|---|---|---|
| 15-Year | $2,696 | $185,280 | $485,280 |
| 30-Year | $1,996 | $418,560 | $718,560 |
Mortgage Tip
Understanding PMI (Private Mortgage Insurance)
PMI is required when you put down less than 20% on a conventional loan. It typically costs 0.5-1.5% of the loan amount annually.
- Cost: $50-$150 per month on a $300,000 loan
- Purpose: Protects lender if you default
- Removal: Request cancellation once you reach 20% equity (80% LTV)
- Automatic Removal: Required at 78% LTV
How Much House Can You Afford?
Lenders use several rules of thumb:
- 28% Rule: Monthly housing costs ≤ 28% of gross monthly income
- 36% Rule: Total debt payments ≤ 36% of gross monthly income
- Conservative Rule: Keep payment below 25% of take-home pay
💰 Money-Saving Tips
- Make extra principal payments to save thousands in interest
- Bi-weekly payments result in one extra payment per year
- Recast your mortgage after lump sum payment to lower monthly payments
- Shop rates with 3-5 lenders - rates can vary by 0.5% or more
- Improve credit score before applying - 20 points can save $100+/month
Property Tax Considerations
Property tax rates vary significantly by state and county. The national average is about 1.1% of home value annually.
- Highest States: New Jersey (2.47%), Illinois (2.23%), New Hampshire (2.18%)
- Lowest States: Hawaii (0.28%), Alabama (0.41%), Louisiana (0.55%)
- Escrow Account: Lender holds and pays taxes on your behalf
- Exemptions: Check for homestead exemptions in your state
Closing Costs to Expect
Typically 2-5% of loan amount. Common fees include:
- Origination Fee: 0.5-1% of loan amount
- Appraisal: $300-600
- Title Insurance: $1,000-4,000
- Attorney Fees: $500-1,500
- Recording Fees: $100-250
- Pre-paid Interest & Escrow: 2-3 months