A mortgage payment is a significant amount of budget spent each month. Contrary to **what** you may have thought, it’s more than just a house payment. There are taxes, fees, **and** other line items that may not be easily understood until undertaking a mortgage. They are relatively easy to see, though.

Take a look at your mortgage statement. Do you see a breakout of charges? Here's **what** you can expect:

The money owed to pay your loan balance. This is explicitly based on the amount of money borrowed **and** **does** not include **interest**.

A percentage charged to the loan balance as repayment to the lender.

**Escrow** is money set aside so a third party can pay property taxes **and** homeowners’ insurance premiums on your behalf. Why? Each month, homeowners are required to pay a portion of their estimated annual costs, including **principal** **and** **interest**. Current law permits a lender to collect 1/6th (two months) of the estimated annual real estate taxes **and** insurance payments at closing. After closing, you will remit 1/12 of the annual amount with each monthly mortgage payment. So, your statement will include a line item — “**escrow**” which states just how much you owe for that month.

Learn about mortgage **escrow** accounts **and** how they work

According to the Real Estate Settlement Procedures Act (RESPA), your minimum **escrow** balance should equate to twice your monthly **escrow** contribution. You can expect your lender to increase your monthly mortgage payment if there are insufficient funds in your **escrow** account to cover property taxes **and** homeowners insurance (or you can pay the shortage in a lump sum). Additionally, you may receive an **escrow** balance refund soon after a loan payoff.

**What** is estimated **escrow**? It's pretty much an approximated monthly cost of your homeowners insurance **and** property taxes. You should be able to find this information under "Projected Payments" on your Loan Estimate Guide.

You may also see the following terms on your mortgage statement. The fees or charges that align with these terms are almost always set aside in an **escrow** account.

Here we are talking about property taxes, which are owed by you — the homeowner. Each monthly mortgage payment will include 1/12 of your annual property tax bill. Those monies are often kept in an **escrow** account, which is further defined below.

If you see the general term “insurance” on your statement, it’s referring to hazard or homeowners’ insurance. You’ll make an initial year’s worth of payments before closing, as part of your closing costs. This insurance will cover you against losses related to your home structure, like fire or hail damage. Going forward, **and** similar to taxes, a lender will collect 1/12 payment each month to cover ongoing premiums which are included in your mortgage payment. The homeowners insurance company is then typically paid twice per year from the accumulated balance in the **escrow** account.

Learn the difference between "cash value" vs "replacement value" home insurance .

As far as mortgage insurance goes — that’s dependent on the loan program **and** the amount of down payment you made. If you put less than 20% down or are using an FHA loan, expect mortgage insurance fees to also live on your statement. It’s purpose: to protect the lender against losing its investment.

Keep in mind your lender should receive copies of your tax **and** insurance bills so they can pay them out of the **escrow** funds collected. You should not be making payments directly to a tax or insurance agent — specific to property taxes, homeowners’ insurance, **and** mortgage insurance.

*Key takeaway*:

**Escrow** helps borrowers by evenly spreading insurance **and** tax expenses over 12 payments instead of one lump sum. Let’s assume your yearly property taxes are two payments of $1,000 each, **and** your annual insurance is $600. If you paid these directly, it would **mean** $2,600 a year. With **escrow**, though, you can expect to make smaller, monthly payments of $217.

Next, let’s breakdown different stages within your mortgage repayment schedule.

Unlike most loans, mortgage **principal** **and** **interest** are paid in arrears — or paid after **interest** is accrued. So, when buying a home, your first payment is due at the beginning of the first full month after closing. If you close on April 10, your first payment is not due until June.

However, when you close on your mortgage loan, the lender will collect **interest** on all remaining days of the month you close . If you close on the 15th of a 30-day month, there will be 16 days of **interest** collected — the number of days remaining in the month, including the 15th. This ensures all payments are the same amount. The closer you are to an end of month closing, the less **interest** you owe that month (since **interest** is prorated by day).

*Key takeaway*:

As you likely expected, you eventually pay all of the **interest** that's due — neither more nor less. If you’re in need of lower closing costs, you can discuss seller concessions with your realtor or assistance programs with your mortgage lender.

An amortization schedule is how your mortgage lender calculates your monthly payments . Since you are being charged **interest** over the duration of your loan, your monthly mortgage payment has to be divided among the **principal** balance **and** **interest**. To do this, the lender looks at the original loan balance after your last payment **and** calculates the amount of monthly **interest** owed vs. the amount applied toward the **principal**.

Let’s consider an example of a $200,000, 30-year conventional mortgage at 4% **interest** (for illustrative purposes only). You’ll notice the sum of the **principal** **and** **interest** payments always equals $955, but disbursement of dollars varies based on how far along you are with repayment.

After a year of mortgage payments, 31% of your money starts to go toward the **principal**. You see 45% going toward **principal** after ten years **and** 67% going toward **principal** after year 20.

Over 30 years you'll pay a total of $343,739, again based on an estimated monthly mortgage payment of $955.

*Key takeaway*:

The more you pay toward the **principal**, the higher the amount of equity you gain. Equity is a significant asset that is often taken advantage of via a home loan refinance . In this example, equity grows at a slower pace. But keep in mind — many loan programs amortize differently. That’s why it’s imperative to discuss your financial goals with your loan officer during the mortgage process. There are many ways to refinance a mortage down the road into something better, but waiting until then may not always be the best path. Finances are tricky. Talk it through with someone who **does** this for a living.

Additionally, making additional **principal** payments can save on **interest** or change the payoff schedule. Use an extra mortgage payment calculator to see how your mortgage might change with extra payments.

Find available First Time Home Buyer Classes **and** Education near you

As you approach the end of your loan term, inching closer to being mortgage-free, it becomes time to settle your balance. Your outst**and**ing **principal** — as shown on your mortgage statement — is not the total amount needed to pay off your loan. This is because **interest** will accumulate up until the day your loan closes. **And**, there may be other fees you’ve incurred but not yet paid, such as late fees, deferred **interest**, hazard/flood insurance, etc. Bottom line — expect a balance that’s higher than your **principal** balance. This is **what**’s called a payoff amount or payoff quote.

*Key takeaway*:

The easiest way to determine your payoff balance — call your mortgage servicer. It’s far easier **and** more accurate than doing the math yourself. You can request a payoff quote that will illustrate **what** needs paying before the loan is resolved. Just know that payoff quotes have expiration dates, **and** some servicing companies may even include a charge to have your payoff faxed or emailed to you. If you do not pay your account in full before the quote expiration date, your payoff amount will change.

Homeownership is exciting, especially as you get closer to owning a house that’s free from a mortgage. But the overall term is lengthy — usually no shorter than 15 years, **and** often closer to 30 immediately after a home purchase. A lot can happen during that timeframe. If questions arise during the loan repayment or payoff process, never hesitate to speak with your Mortgage Consultant. It’s essential for you to underst**and** mortgage payment structure, as well as refinance options that may lower monthly payments.

The principal is the amount you borrowed and have to pay back, and interest is what the. For most borrowers, the total monthly payment you send to your mortgage company includes other things, such as homeowners insurance and taxes that may be held in an escrow account. more

Definition. Simple Interest can be defined as the sum paid back for using the borrowed money, over a fixed period of time. Compound Interest can be defined as when the sum principal amount exceeds the due date for payment along with the rate of interest, for a period of time. Formula. S.I. = (P × T × R) ⁄ 100. more

Simple Interest is calculated using the following formula: **SI = P × R × T, where P = Principal, R = Rate of Interest, and T = Time period**. Here, the rate is given in percentage (r%) is written as r/100. And the principal is the sum of money that remains constant for every year in the case of simple interest. more

The formulas for both the compound and simple interest are given below.Interest Formulas for SI and CI. more

Banks use **compound interest for some loans**. But compound interest is most commonly used in investments. Also, compound interest is used by fixed deposits, mutual funds, and any other investment that has reinvestment of profits. more

When you put your money in a savings account, **interest is the return you receive on your savings from the bank.** **Interest rates indicate this cost or return as a percentage of the amount you are borrowing or lending** (since you are “lending” your savings to the bank). more

When it comes to investing, **compound interest is better** since it allows funds to grow at a faster rate than they would in an account with a simple interest rate. Compound interest comes into play when you're calculating the annual percentage yield. That's the annual rate of return or the annual cost of borrowing money. more

Generally, simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent. Compound interest accrues and is added to the accumulated interest of previous periods, so borrowers must pay interest on interest as well as principal. more

*Source: www.americanfinancing.net*

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