What Really Goes Into Your Monthly Mortgage Payment?
We all know that buying a home is a big financial decision—likely among the largest you will make your life. So what is all your money going toward, really? It goes far beyond just principal and interest on the actual home. Check out this list of monthly expenses you will likely encounter as a homeowner.
If you aren’t paying for your home upfront in cash, you will have to finance it. Your monthly mortgage payment goes toward the amount you originally borrowed (principal) and the interest on that principal. The amount is calculated based on how much you borrowed, the interest rate you and your lender agreed upon, and the length of the loan.
Your credit standing has a big influence on what your interest rate will be and thus the size of your payments; checking your credit before you shop for a home is wise. (You can get a free credit report summary, updated every 30 days, at Credit.com.)
Taxes can add hundreds of dollars to your monthly bills, but they help cover valuable public expenses such as community safety, schools, infrastructure, and more. Depending on where you live, you will incur different tax rates. Property taxes are calculated by local government and are usually based on your home’s assessed value.
Between basic homeowners insurance, which offers protection against fire and theft, and private mortgage insurance, which protects your lender against your defaulting on the loan if your down payment was less than 20% of the mortgage value, insurance can be a big item in your monthly budget. And don’t forget that you may need additional coverage against things such as floods or earthquakes depending on where your home is located.
Owning a home means you are responsible for repairs and upkeep, unlike when you rent. It’s important to have money set aside in your budget to cover everything from small do-it-yourself jobs to the serious issues that inevitably come up from time to time. Hopefully your home inspection can help prepare you for the life expectancy of major components such as the roof, plumbing, and electrical system.
Every month, you have to pay your utility bills, from heating and cooling to electricity, natural gas, and water. These can fluctuate throughout the year based on outside conditions such as temperature and humidity. It’s a good idea to budget for this variable expense by looking at the previous year’s usage.
If you purchase property in a condominium- or townhome-type community covered by a homeowners association, you will have to pay yearly or monthly fees to maintain common areas and other shared expenses.
The bottom line: Prepare yourself. It’s important to understand the full costs of homeownership. Do your best to know what is coming and create a comprehensive budget that accounts for the whole package.