Home Buyers Need to Know What is in a Mortgage Payment
It is not uncommon for a Borrower to be surprised by the amount of the Monthly Mortgage Payment on a property they want to purchase. This is because many Borrowers go online and try to calculate the mortgage payment on their own by using an Online Mortgage Calculator. Mortgage Calculators are great for providing Borrowers a quick idea of what to expect for a Payment, however, they can also create false expectations of what to expect.
The main reason why Borrowers many times get the wrong monthly mortgage payment when they use an Online Mortgage Calculator, is because they put in the wrong or incomplete information. So Borrowers Need To Know What Goes Into A Monthly Mortgage Payment. Some of the wrong or incomplete information Borrowers input into an Online Mortgage Calculator is:
- They select the wrong Mortgage Program.
- They do not calculate Private Mortgage Insurance (PMI), or FHA Monthly Insurance Premium (MIP).
- They input the wrong amount for homeowners insurance and/or property taxes.
As a result a common response I get fairly often from Borrowers that the Mortgage Payment is higher than they expected. When I get that response I take time to ask them what information they put into the Online Mortgage Calculator. As we go through the information they inputted, it soon becomes clear what they omitted, or incorrectly imputed.
The same misunderstanding can also happen if a Loan Originator assumes the Borrower knows What Is Included In A Monthly Mortgage Payment. So it is important for Loan Originators to take the time to explain to each of their Borrowers, not only how much they will be paying each month, but also how they arrived at the figure by explaining each of the different components which make up their Monthly Monthly Payment.
A common term in the Mortgage Industry when referring to the Monthly Mortgage Payment is PITI. PITI is what makes up the basic Monthly Mortgage Payment on every loan. Even those who will not contain all of the PITI components in the Monthly Mortgage Payment, because the Borrower will be paying them separately. However, in applying for a mortgage ALL the components will be included into the Borrowers Debt-To-Income Ratios in approving the Borrower for a mortgage. PITI simply stands for:
Principal – This is the portion of the Monthly Mortgage Payment which reduces the remaining balance of the money borrowed.
Interest – This represents the cost of borrowing the money, and is stated as a percentage of the outstanding balance on the loan. On a 30 year fixed loan, the total interest is almost the same amount as the amount of money that is borrowed.
Property Taxes – This is the money collected each month as part of your Monthly Mortgage Payment, so the Lender can pay the town Property Taxes when they come due. Taxes will differ from town to town, depending on the mill rate the town sets for that year. The mill rate is calculated as a percentage of each $1,000 the town assesses on the property value at. Taxes are one of those items the Borrower may elect to pay on their own, and not as part of their Mortgage Payment to the Lender. But it is still part of the Housing Payment, and therefore included in the Debt-To-Income Ratios, and the total debt in qualifying the Borrower for a mortgage.
Homeowners Insurance (Hazard Insurance) – This is the money collected each month as part of the Monthly Mortgage Payment, so the Lender can pay the Homeowners Insurance Premium to the Insurance Company each year. Homeowners Insurance is required on all loans to protect the Homeowner and the Lender for a loss, damages, theft, and liability coverage. Homeowners Insurance just like Property Taxes can be paid separately and not included in the Payment. But is include in the Debt-To-Income Ratios for the same reason as stated above for the Property Taxes.
These are the 4 components which make up the PITI (Principle, Interest, Taxes, Insurance), but there may be other fees which could also be part of a Mortgage Payment such as:
Private Mortgage Insurance (PMI) or FHA Monthly Insurance Premium (MIP) – If a Borrower makes a down payment less than 20% of the selling price of the property they purchase, they will need to pay PMI. PMI is required by the Lender to protect the Lender in case the Borrower defaults on the loan, and the Lender has to foreclose on the property. When a Borrower is required to pay PMI, it will be calculated as a monthly amount which will be collected each month as part of the Mortgage . A Borrower will be required to pay PMI until the Borrower has acquired 22% equity in the property on a Conventional Loan. On a FHA Loan the Mortgage Insurance Premium (MIP) works differently than it does on a conventional mortgage. The MIP now remains for the life time of the mortgage on 30 year fixed FHA Loans with less than 10% down, and 11 years for most of the 15 year fixed FHA Loans, and 30 year fixed FHA Loans with 10% or more down.
Condo Fees or Homeowner Association Fee: If the Borrower purchase a Condominium they will pay a monthly maintenance fee each month to the Condo Association, or Condo Management Company. The same fee is also charged by Housing Subdivisions who have common areas that need to be maintained. Even though these fees are always paid separately from the Mortgage directly to the Condo Association, or Condo Management Company, they are still part of the Housing Payment. Therefore, these fees are part of the Borrowers Debt-To-Income Ratio in qualifying for a mortgage. As a borrower you need to tell your lender that you are buying a condo because you will need to qualify for a ‘higher’ amount. Why? Condo fees are an extra monthly expense that will be factored into your borrowing needs. You can’t qualify equally for a $200,000 home vs. a $200,000 condo…this is a big surprise to many borrowers.
If Borrowers understand what is included in a monthly mortgage payment. they will not be surprised when they meet with a Loan Originator to apply for a mortgage.
Thank you George Soutu for bringing this mortgage information to the forefront for my RI home buyers. As a RI coastal real estate agent it is important to me that I do this with all my RI real estate buyers.
Home Buyers Need to Know What is in a Mortgage Payment
Info about this post’s author and guest mortgage blogger, George Soutu:
George Souto is a mortgage Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County. George can be contacted at (860) 573-1308 or firstname.lastname@example.org.
I appreciate George’s shares on mortgage information in the current real estate times with my web site readers.
As a Rhode Island real estate agent and licensed RI Real Estate Agent, Ginny Lacey Gorman, helps list homes and waterfront property in Rhode Island at 401-529-7849 or email me at Ginny@RiHouseHunt.com.