So just how much will your mortgage payment be, and why is it almost never the number people expect?

The purchase price of the home is only the starting point. Your monthly payment is built from several pieces, and only one of them is the loan itself. If you know what those pieces are before you write an offer, you can budget with a lot more confidence.

There are five main parts people should understand before they buy. Four of them usually show up in the payment your lender collects. The fifth is a real cost, but it is billed separately.

That full number is your mortgage payment, and it is the figure to budget for.

Principal

Principal is the amount of the loan you are paying back every month.

Think of it as the price of the home minus the down payment you bring to closing. Whatever is left is what you are borrowing from the lender to buy the home from the seller.

The more you put down, the less you are borrowing, and the lower that portion of the monthly payment. The reverse is also true. A smaller down payment means a larger loan, and a larger principal balance to pay down over time.

Interest

Interest is what you pay the mortgage lender on top of the principal for loaning you the money.

It is the cost of borrowing. The lower the interest rate, the lower that portion of the monthly payment. Rate, loan amount, and loan term all work together here. Two buyers with the same purchase price can have very different payments if their rates or down payments are different.

Property Taxes

Property taxes are set by the local taxing authorities. They are based on that home, the authority’s estimate of its value, and the local tax rate.

This is why two similar houses in different towns, or even different school districts, can have very different monthly payments. Lenders usually collect taxes with the mortgage payment. They hold that money in escrow and pay the bill when it comes due. The tax bill itself still comes from the local government, not from the lender.

Homeowners Insurance

There are often two types of insurance in the housing budget.

Homeowners insurance protects you and your family from a loss. That can be a fire, a hailstorm, or another covered natural disaster, and it helps cover the cost of repairing or replacing the home. Lenders require it, and the premium is often collected with the monthly payment.

Mortgage insurance may apply if you put less than 20 percent down. It is a factor of both the amount you put down and your credit score. It protects the lender, not you, if the loan goes into default. On many conventional loans it can be removed later once you have enough equity. It is not the same thing as homeowners insurance.

Mortgage Insurance

Mortgage insurance is the fifth part of a mortgage payment. It does not apply to every loan. It usually comes into play if you put less than 20 percent down. The cost is a factor of both the amount you put down and your credit score.

This is not the same thing as homeowners insurance. Mortgage insurance protects the lender, not you, if the loan goes into default. On many conventional loans it can be removed later once you have enough equity.

In addition to your Mortgage Payment: HOA Dues

This last cost does not apply to every home, but it applies to quite a few. Those are the homeowners association dues.

A lot of people have dealt with an association that felt a little militaristic, or like it was over-managing the household. Associations still serve a purpose. They help protect the value of your property, and they help keep the value of the whole neighborhood up. In some communities they also cover amenities, such as a swimming pool or other shared features, and that cost is built into the dues.

Here is the part that trips people up: those dues are usually not part of your mortgage payment. Sometimes they are billed monthly. Sometimes they are quarterly, semi-annually, or annually. They do not go back to your lender. You pay them directly to the association, however often it bills.

Leave them out of the budget and the monthly number will look better than real life.

What this means for your mortgage payment

A useful way to think about the lender’s mortgage payment is Principal, Interest, Taxes, and Insurance. Mortgage insurance may be added if your down payment is under 20 percent. HOA dues belong in the household budget too, but on their own line, paid to the association.

Understanding those pieces is what lets you plan ahead and buy with a clearer number, instead of being surprised after you are under contract.

If you want to see what your home-buying budget could look like, please reach out. You can call or text me on my cell phone anytime at (214) 542-4095, or reach me by email at Rob@TeamRobHomeLoans.com .