Mortgage Breakdown Explained

Updated: Feb 20






Mortgage fees are also referred to as closing costs which are the total of all the expenses involved with getting your mortgage. You may get a rough idea of what your mortgage fees will be from an estimate that your Lender gives you. When you close the loan, you will get a closing statement that informs you of the exact amount of money that you will have to pay at closing.


Unlike rent, which consists of, well… rent, your monthly mortgage payment may consist of several different components. You might have heard the term “PITI” (pee-eye-tee-eye). This means Principal, Interest, Taxes, and Insurance. If you observe “PITIA”, the “A” represents Association Dues, which you’d likely come across with a townhome or a condo.

Below is a list of common mortgage fees and what they represent. Some of them are recurring while others are non-recurring. Because every loan, lender, and location is different, not all of these fees apply to your loan.


- Principal and interest.

This is the part of your payment that goes toward paying down the balance of your loan. Your interest is applied first, and the remainder is applied to your principal, which in turn reduces the balance of your loan.


- Property Taxes.

When you own property, it is mandatory to pay taxes on it by the law. The amount of taxes you pay varies from state, city, and neighborhood, but normally, a conservative and realistic expectation would be to pay roughly 1.25% of the purchase price over one year. This amount can be divided by 12 and paid as part of your monthly mortgage payment.


- Homeowners’ Insurance.

Just like you probably have car insurance provided to you by a mortgage lender, you’ll need to have homeowners’ insurance to cover your new home. This is needed by the bank for them to issue the loan to insure against damages that may be caused by fire, storms, accidents, etc. Your mortgage expert may put you in touch with an insurance agent to aid you in setting this up during your loan process.


- Association Dues.

Not everyone with a mortgage has Homeowner Association (HOA) or Condominium Owner Association (COA) fees to pay. However, if you buy a townhome or a condo, or any other property that’s run by a management company, you are likely to pay HOA/COA fees. Depending on the property’s amenities and location provided by the management company, the fee will vary.


What is Private Mortgage Insurance (PMI)?


Private mortgage insurance, also known as PMI, is mortgage insurance you are required to pay for if you have a conventional loan. Like other forms of mortgage insurance, PMI protects the lender. PMI is arranged by the lender and issued by private insurance companies. PMI is required when you have a conventional loan and make a down payment of below 20 percent of the home’s buying price. If you are refinancing with a conventional loan and your equity is below 20 percent of the value of your home, PMI will also be a requirement. In simple terms it’s insurance that the bank takes to protect itself if a borrower ends up defaulting whereby, they pass the fee onto you, the borrower.



What is an amortization schedule?


An amortization schedule is a table that shows what monthly payments you agree on with your lender to make if you take out a loan for a certain amount with certain conditions. Repayment schedules may be used to illustrate how your interest burden changes with varying interest rates, or how big the amortization portion of the respective payment is.


Difference Between 15 Year and 30 Year Mortgage


The decision between a 30-year or 15-year mortgage will impact your finances for decades to come, so ensure to crunch the numbers before deciding which best suits you. If you aim to pay off the mortgage sooner and you can afford high monthly payments, a 15-year mortgage might be a better choice.

The lower monthly payment of a 30-year loan, on the other hand, might allow a borrower to build up savings, buy more property or free up funds for other financial goals.

For a 30-year loan, the principal balance does not decline as fast as it does for a 15-year loan.


It is way cheaper, in the long run, to pay off a 15-year loan where you do not incur loan-level price adjustments, unlike 30-year loans.

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Below is a video that will be helpful as well:




Mortgage Calculation


Before purchasing a home, it’s important to know that if you can easily afford the monthly mortgage payments. Most banks and lenders offer online mortgage rate calculators, which factor in the interest rate, the price of the house, down payment, and loan term to determine your monthly payment. While a bank may approve you for a $200,000 mortgage, you can input the price of cheaper properties to see their respective monthly payments and use it to determine what might work best for your budget.


After the bank or private lender gives you an interest rate, you may choose a preferred mortgage term, which is between 15 and 30 years. The monthly payment (c) depends upon (P) = the amount borrowed, known as the principal, (N) = the number of monthly payments i.e. loan terms, and (r) = the monthly interest rate, shown as a decimal, not as a percentage.

So, the monthly percentage rate will be the yearly percentage rate divided by 12.


M=P[r(1+r)^n/((1+r)^n)-1)]

Note that the carat (^) indicates that you’re raising a number to the power indicated after the carat.

You can choose to calculate your monthly payment by putting the value of (P), (N), and (r) into the formula mentioned above. Alternatively, you can also use an online mortgage calculator to establish your monthly payment by putting the value of the variables used in a mortgage calculation (as shown above) and then click the “Calculate” option to get the monthly payment for the mortgage.


How does it work?


To calculate your monthly mortgage payment, you can follow the steps mentioned below: -


1. Firstly, define the principal (P= the amount of loan). This is the amount you borrow from your bank or lender. The loan amount you borrow correlates to your household income or affordability.


2. Secondly, define the Interest rate (r). The interest rate may be fixed or adjustable. For Adjustable Rate Mortgage (ARMs), the interest rate is fixed for some time. You have to indicate the interest rate as a decimal fraction instead of a percentage. For instance, if the interest rate is 5 %, use the value 0.05 or 5/100.


3. Thirdly the Interest rate is given as an annual rate, while the interest on a mortgage loan is compounded into monthly payments. So, you should convert the annual interest rate to the monthly rate by dividing the annual interest rate by 12 to get the monthly interest rate. For example, if the annual interest rate is 5 percent, divide the decimal fraction 0.05 by 12 to get the monthly interest rate that will be 0.00416.


4. Define the (N) as the total number of monthly payments needed to pay the debt. The loan period is given in years while the payments are made monthly. So, multiply the loan term by 12 to get the number of monthly payments to be remitted. For example, if N= 15 years, 15×12 = 180 for the value (n) into the formula.


5. Finally, put the values of (P), (N), and (r) into the equation to get the monthly mortgage payment.



What Is a HOA?


HOA refers to a homeowner’s association. HOA consists of single-family units in a neighborhood or a gated community.


When you purchase property in these communities, you become a member of the HOA. All homeowners share ownership and are free to use common areas such as fitness centers, clubhouses, swimming pools, basketball courts, and so on.

HOA is governed by a board of directors, who ensure that the community’s rules and regulations are followed. They are responsible for the day-to-day management of the community, including regular repairs and maintenance of amenities and facilities.

What Is a COA?


COA refers to the condominium owner’s association. In a COA, anybody who purchases a unit in the building shares ownership of common areas such as the elevator, swimming pool, lobby, and gym.


Unit owners also share responsibility for the maintenance of roofs and communal walls. Members of a COA pay monthly fees that cater for repairs, maintenance, and services such as trash collection, landscaping, and snow removal.


What Does POA Stand For?


POA means for property owners association that is expansive and may encompass both HOAs and COAs. POAs govern a mixture of businesses and residential properties. And so, a POA can span to several neighborhoods, an entire town, or even several towns.


POAs may implement development projects, enhancement projects, and zoning restrictions. Rather than only maintaining property values (like in an HOA or COA), the main objective of a POA is to sustain and encourage the long-term development of a larger area. POA members are required to pay fees too.

However, the fees are paid annually instead of monthly. The amount also depends on the maintenance needs of your area and the different services it requires.


Conclusion


A key thing to keep in mind is to ensure you do not allow yourself to become "house poor". You may qualify for a particular home based off of your income but due to the other expenses you have in life (car note, daycare, utilities) you may not be able to afford the highest amount you qualify for. Even when you do get a home you can afford (recommended amount is mortgage no higher than 25% of monthly income) look into purchasing products for your home that will lower your utility bills. This keeps more money in your pockets.