Mortgage Payment Breakdown

Your mortgage payment typically includes principal and interest and may also include property taxes, home owners insurance. This is often referred to as PITI in the mortgage industry (principal, interest, taxes and insurance). If you have less than 20% down payment or home equity, then you probably have some form of mortgage insurance as well (unless you qualify for a VA mortgage). Some portions of the mortgage payment may change over time.

Principal and interest. If you have a fixed term mortgage, such as one that amortizes for 30, 20, 15 or 10 years, then the total principal and interest payment should stay the same for the term of the loan. Over the life of the loan, you actually wind up paying more towards principal and less towards interest but the total principal and interest remains the same.

If you have an adjustable rate mortgage (ARM), where the interest rate is fixed for a set period, such as a 5, 7 or 10 year ARM, then the principal and interest payment will adjust once the initial fixed period is over and will continue to adjust according to the terms of the mortgage. NOTE: Should you decide to opt for an adjustable rate mortgage, it is crucial that you completely understand how an adjustable rate mortgage works and what the best/worst possibilities may be when the mortgage interest rate adjusts.

Home equity lines of credit (HELOC) typically begin as interest only with the interest rate adjusting when the prime rate adjusts. Some will either become fixed and be amortized for a short term and/or may have a balloon payment.

There are other types of mortgages as well – I’m just trying to cover the most common payment types with this post so that I can cover the other parts of the mortgage payment.

Property taxes. Property taxes are based on how much your home is tax assessed for. It’s not unusual to see the tax assessor increase the taxed assessed value of your home after you have purchased it…especially if your sales price is significantly higher than the current assessed value. In addition, when levies are passed that are attached to property taxes, this causes your property taxes to increase. Should your property taxes increase, your mortgage payment will increase as well. I would plan on having your mortgage payment increase over time for adjustments to property taxes. King County just announced that they will reveal 2019 property taxes on February 15, 2019 and I anticipate that many of us, because of the rapid appreciation our area has seen, will have higher mortgage payments due to property tax increases.

Home owners insurance. Your home owners insurance should not adjust as much as your property taxes. It’s very likely that it will adjust higher for inflation over time and it can also adjust should you make changes to your coverage. NOTE: should you decide to do adjust your coverage, like add earthquake insurance, please be sure to discuss with your insurance provider how much funds you will need to meet the deductible (and make sure you have those funds available). This part of your payment is not fixed – however, it’s not likely to dramatically change.

Mortgage insurance. There are a couple of different types of mortgage insurance. Private mortgage insurance (PMI) is used with conventional mortgages when there is less than 20% down payment or home equity. Private mortgage insurance, if included in your monthly mortgage payment, will eventually drop off your payment once you meet certain equity requirements (refer to your amortization schedule). You can sometimes request that your private mortgage insurance be removed ahead of schedule should you have enough equity – perhaps from appreciation, and once you have been in the home long enough (typically they like to see at least 2 years).

Mortgage insurance on government loans, such as FHA and USDA, are referred to by different names…but they are essentially mortgage insurance. Depending on the amount you have for down payment or equity (if you’re doing a refi) and the type of government loan, the mortgage insurance may stay on the loan and may be required regardless of how much equity/down payment you have at the start of the transaction. FHA has “upfront mortgage insurance” which is typically financed into the mortgage (added to the loan amount) and “annual mortgage insurance” which is included in your monthly payment. If you have 10% down or more, the mortgage insurance remains in the payment for 11 years. If you have less than 10% down, the the mortgage insurance remains on for the life of the loan.

Even though it takes years for FHA mortgage insurance to drop off a payment (if ever), depending on how much down payment you have with a conventional mortgage, it could potentially take many years as well. Odds are, you may be refinancing into a new mortgage or buying your next home before the mortgage insurance, whether it’s private or government “drops off” the mortgage payment.

What happens if your property taxes or home owners insurance changes?  The property taxes and home owners insurance premiums that you pay each month as part of your mortgage payment (unless your escrow reserve account is waived) goes into the lenders “escrow reserve account”. The lender collects these funds and then pays your home owners insurance once a year, when the annual bill is due and pays the property taxes twice a year, when the first half and second half property taxes are due.  Should your property taxes or home owners insurance increase and the lender discovers there is not enough funds in the reserve account (aka “a shortage”), have no fear! They will contact you to let you know how much the shortage is and let you know how much your payment is going to increase (based on the increase to the taxes and/or insurance) and to see if you want to pay the shortage amount in a lump sum and/or additional increase to your mortgage payment. With that said, it’s also possible for the lender/mortgage servicer (who you make your mortgage payment to) to contact you if you have too much funds in your escrow reserve account. By law, the mortgage servicer can only have a certain amount of cushion in the reserve account. In that event, they will offer to send you a check or reduce your mortgage payment.

Bottom line, it’s important to know and understand your mortgage payment. If your home is located anywhere in Washington state and you would like me to review your mortgage, I am happy to help you! No refi or purchase required. 🙂

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