What Is the Real Cost of a Mortgage?

The costs of owning a house

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The total cost of a mortgage is comprised of four main elements:

  1. Principal
  2. Interest
  3. Taxes
  4. Insurance

PITI is part of the formula that mortgage lenders use when calculating your affordability ratios. Many times home buyers ignore these additional costs when figuring how much of a home they can afford.

Principal: Principal represents the amount you borrow, which has to be repaid over time.

Interest: Interest is the cost that mortgage lenders charge for the use of their money during your repayment schedule.

Taxes: Taxes are an assessment that local governments collect on property to pay for local services. Property tax rates will vary by location and can affect your total cost and affordability.

Insurance: Homeowner’s Insurance will be required to replace the value of loan in the event of a disaster such as fire, earthquake, flood, etc.

Understanding Escrow

Property taxes and insurance costs must be collected and paid when they are due. In most cases, mortgage lenders will make the collection by allocating the amount you need to pay for taxes and insurance each month to your mortgage payment. These collections are placed in escrow, a depository account that the bank manages.

Your total monthly mortgage payment will include payments for real estate taxes, insurance, and Private Mortgage Insurance (PMI), as well as other items that are placed in escrow and used to pay taxes, insurance, PMI, and other items on your behalf when they come due in the future. Note that the escrow portion of your monthly payment may increase or decrease, depending on the change of your taxes and insurance assessments. If your mortgage does not have an escrow account, you will be required to pay your taxes and insurance separately and show proof of payment to your lender.