Mortgage Payments Explained

What is included in each mortgage payment?

1 Answer

This can vary depending on how you structure your mortgage. There is actually quite a long list of items that can be classified as components of a mortgage payment:

  • Principal (the amount that you are actually paying toward your balance. it is the only portion of your payment that reduces your loan balance)

  • Interest

  • Property Taxes

  • Homeowner's Insurance (also called Hazard Insurance)

  • HOA Dues (If you have a Home-Owners'-Association that charges dues. This is most common among condos and to a lesser degree, townhomes.)

  • Mortgage Insurance (If you have a loan that requires mortgage insurance, this will often be part of your monthly payment.

There can even be other items included in a payment, however these six are the most common. Even then, very few mortgage payments even contain all six.

For example, any interest-only loan will not pay any principal for a certain period of time. Furthermore, any loan under 80% LTV ( loan-to-value) ratio will not have mortgage insurance. Even some loans over 80% LTV do not have mortgage insurance.

Property taxes and homeowner's insurance are sometimes at the borrower's discretion. This means you can choose to include them in your payment, or pay them all in a lump sum once or twice per year. Keep in mind that many loan programs offer a pricing improvement if you elect to keep them as part of your mortgage payment.

HOA dues will almost always be a part of your payment if your HOA in fact charges dues.

The inclusion or exclusion of Principal, Taxes, and Insurance can greatly reduce your monthly mortgage payment. But many people that elect to do this find that they struggle to come up with the cash to pay these things when they come due. As a general recommendation, it is always safest to plan your mortgage payment with all of these items included (of course you would not include Mortgage Insurance, or HOA dues if you don't have them).

Investors trying to maximize cash flow, excellent budgeters, or those with excess disposable income are exceptions to that general recommendation. If you know you are going to have plenty of cash to cover your tax and insurance bill, or you have budgeted for it already, then it is all a matter of personal preference.

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