What Makes Up a Payment

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Purchase Price

A home’s list price is the seller’s asking price when a house is put up for sale. Once you understand how much home you can afford, the list price is one of the key items to consider when you start looking at homes. However, the amount the seller hopes to get and the amount he or she will accept may be different. You may be able to negotiate a lower price (in some markets, houses may sell for higher than the asking price). The home’s purchase price is the price that you and the seller agree to and one of the key elements to determining your mortgage payment.

Monthly Payment

Principal and interest make up the majority of your monthly mortgage payment. Principal refers to the amount you borrow. When you pay principal on a loan, the money goes toward paying down the loan balance.

Interest is the percentage rate the lender charges you for the privilege of borrowing money. You may see lenders refer to payments of principal and interest as “P&I.” The amount of your payment that goes to interest is calculated based on the remaining principal. This means that during the first few years of your loan term, more of your payment will go toward interest. With each payment, more of the payment will be directed toward paying the principal. Consider this payment breakdown for a $250,000, 30-year mortgage at 3.5%:

Month Payment Amount Applied to Principal Amount Applied to Interest
1 (First payment) $1,122.61 $393.45 $729.17
2 $1,122.61 $394.59 $728.02
3 $1,122.61 $395.74 $726.87
360 (Last payment) $1,122.61 $1,119.35 $3.26

Your monthly payments are higher when you have a shorter-term, 15-year loan because you have less time to pay off the loan. However, you’ll end up paying less overall for the loan because you won’t be making payments for an additional 15 years as you would with a longer-term, 30-year loan. Take a look at how the payment for the same $250,000 loan changes for a 15-year term:

Loan Term Monthly Payment Total Payments Over Loan Term
30-year loan $1,122.61 $404,140.22
15-year loan $1,787.21 $321,697.14

You can see that your payments for the 30-year loan are lower, but you’ll end up paying more over the life of the loan. The 15-year loan payment is higher, but you’ll pay less overall—about $82,000 less.

Taxes and Insurance

In addition to principal and interest, monthly mortgage payments may also include an added amount for property taxes and homeowners insurance, sometimes known as “PITI.” It’s common practice for lenders to include these charges with your monthly loan payment. The lender then keeps this extra money in a separate escrow account and uses the escrow funds to pay tax and insurance bills on your behalf.

Lenders usually require an escrow account for borrowers who contribute less than 20% down payment on a home loan. If you meet the down payment requirement, or your lender doesn’t require that you use an escrow account, you can choose to pay the insurance and taxes yourself. This allows you to earn interest on the money you save before you pay the bills. However, you must be disciplined about saving and not use the funds for other expenses. 

Estimate Your Fixed Monthly Payment

Use this calculator to estimate your monthly mortgage payment:

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