Issued by banks, credit unions, and online lenders, a mortgage is the overall cost of your home payed in monthly installments. A payment is made up of four parts:

The Principal Balance

An outstanding principal balance is what you owe for the home. If you and a seller have agreed on the price of $175,000 for a house, then your principal is $175,000. However, during the process, you’re required to pay a down payment. The more funds you put down, the less your principal balance.

The Interest

This is the cost of taking out the loan. The interest, together with the principal, is the majority of your mortgage. But how do you calculate these numbers?

Using the same example, let’s say you have an interest rate of 3.5%. If you put down $20,000 as a down payment on the $175,000 home, you’re left with $155,000 as the principal.

$155,000 X 3.5% rate = $5,425 total annual interest
$5,425 / 12 months = $452 total monthly interest

Interest is always required together with the principal balance. The good news is that the more you pay down the principal, the less you pay in monthly interest.

Taxes

Property taxes vary based on the location and value of your home. Lenders will calculate the yearly taxes, divide that amount by 12, then include it in the monthly mortgage payments.  Note that even after the mortgage is paid off, property taxes are still required. However, instead of the lender paying on your behalf, the responsibility becomes yours.

Homeowners Insurance

Depending on where you live, supplemental mortgage insurance protects you in the event of certain risks. Unpredictable situations like fire, theft, and natural disasters are covered.

Keep payments Low

It is possible to keep payments down. Before the mortgage is finalized, be sure to shop around and compare rates even before you’ve started house hunting. Familiarizing yourself with the market and current rates prepares you for the best monthly mortgage possible!