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Mortgages!! What are you actually paying every month, when you take out a loan on a home? Rents and mortgages usually are lumped together, in conversation or just in the way we think about them. They’re both what you pay to live in your home for that month. In reality, they’re actually quite different.
Rent vs. Mortgage
Rent is just that, it’s how much it costs for you to rent where you live from the owner for that month. Your utilities may or may not be included in that number. A mortgage is a similar concept, but there’s more to it than that! There are four main components that will make up the average mortgage payment. They are the principal, interest, insurance, and taxes. Let’s dive a little deeper into each one of these.
Principal
When you take out a loan, for anything, let’s use a car as an example. You pay off the principal and you are also charged interest for borrowing that money. That’s no different when you take out a loan for a home. The difference is that a car loses value over time, while a home gains value. Let’s use my mortgage as an example. I pay just under $2,300/month as my mortgage payment. And about $700 goes toward my loan principal. The price of my home has also appreciated about 16% since we purchased, it in the Summer of 2021. So the value of my home to me as an asset is that 16% appreciation plus about $15,400 that we’ve paid towards our loan principal. ($700/month * 22 months) Pretty cool beans right there, y’all!
Interest
The second component of a mortgage payment is the interest. Which is the percentage amount of your loan, the loan originator will charge, to lend you money. This is why when interest rates are higher mortgage payments go up. The nice thing about a mortgage is that you’re not locked into your rate for the life of the loan. If your rate is at 7% when you purchase your home, and then in two years rates drop down to 5%. You can always refinance to the new lower rate and start saving on your mortgage every month.
So let’s do the math. Let’s say it would cost you $5,000 to refinance from a 7% rate down to 5%. And that would save you $200/month on your mortgage. So, in this scenario, it would take you just over two years to make back your initial investment of $5,000. And for every other payment after that two-year mark you would be pretty much earning an additional $200/month you would have been spending on your mortgage at 7%!
Escrow Account
The last two components that make up a mortgage payment are insurance and taxes. These are usually combined into what’s called an escrow account. So when you have a mortgage a portion of your payment goes to your escrow account. That account is used to not only pay your homeowners insurance and private mortgage insurance. But, also to pay your property taxes as well. This way you don’t have to keep track of a bunch of different payments every month, it’s all in one place for you from your single mortgage payment!
Conclusion
So, to recap a mortgage is made up of principal, interest, insurance, and taxes. Paying your mortgage on time every month helps you build equity in your home, and also makes it simple to pay for your insurance and property taxes every year. I hope you gained some knowledge on what components make up your mortgage payment every month. It’s not something that is always thought about, so knowing this info upfront is useful!
If you have any other questions about mortgages, the home-buying process, or really anything at all, just let me know! I’m always happy to help 🏡👍🏾
J-Cain
Phone: (253) 882-7974
Email: jordancain@windermere.com
Instagram: @jcainhomes
