Lessons From a First-Time Home Buyer: Mortgage Payments vs. Monthly Payment
Even if you’ve never owned a home, you’re probably aware that there are several regular expenses you’ll need to concern yourself with. Yet, something you might not realize is that what’s often referred to as your “mortgage payment” typically encompasses more than your interest and principal. So what’s the difference between a mortgage payment and your actual monthly payment? Let’s take a quick look.
What’s the Difference Between a Mortgage Payment and Monthly Payment?
As you surely know, as a homeowner with a mortgage, you’ll be responsible for making monthly payments on your loan. These payments are calculated by taking your principal amount and interest and dividing them into equal payments — although, if you look at the breakdown, the ratio of interest to principal will shift over time. For example, our total loan was $176,000 at 7.999% interest. So, our monthly mortgage payment comes out to $1,291.30.
With that said, the amount we pay to our mortgage lender each month is not $1,291.30 — it’s $1,455.05. Why the discrepancy? This is where estimated escrow comes in.
In short, your escrow account is in place to help ensure that you’ll have money to cover both your homeowners insurance policy and property taxes the following year (if you have a homeowners association, these dues may also be factored in). Since both of these expenses are not only important but required, the mortgage lender doesn’t want to jeopardize your loan by allowing either to lapse. So, they’ll estimate how much you’ll need to pay and essentially have you automatically save toward these upcoming bills. On top of that, you may be required to pre-load your escrow account when closing on the home.
For us, the estimated annual property taxes are $962.05 while our annual homeowners insurance policy is currently $1,003. Divided by 12, this results in monthly payments of $83.58 and $80.17 respectively. Combined, those two bills explain the $163.75 difference between our $1,291.30 mortgage payment and $1,455.05 total monthly payment.
By the way, if you’re budgeting for a home and want to know what to expect in terms of a monthly expense, there are some tools you can try. Perhaps the easiest is Google’s mortgage calculator. Although, by default, this tool will simply show how much your mortgage payments will be based on your total loan and interest rate, there is an option to toggle on estimated taxes as fees. Hopefully, just by turning this on, you’ll have a better idea of how much your monthly payments will be. But, if you want to get even closer to your real number, you may want to research the actual amount of property taxes you can expect to pay by checking your state, city, or county’s website(s).
Between your homeowner insurance, property taxes, HOA dues, and perhaps other expenses, what you pay every month for your “mortgage payment” may cover more than just your loan. Because of this, when determining whether it makes more sense to rent or buy and budgeting for a new home, you’ll want to make sure that these expenses are properly taken into account.
P.S. – for a much closer look at how much our home cost us, I did a full breakdown of our closing disclosure over on Money@30.