What costs are included in a mortgage payment?
When trying to find out how much you can afford in a mortgage payment, don't forget that there is more to a mortgage payment than just the loan amount. A home mortgage payment is usually made up of your loan payment, taxes, and insurance. Some communities may also charge an association fee that can also be added to your mortgage payment.
Principal
Principal is the actual amount of your home loan. As you make payments, a portion of the payment goes to pricipal, and a portion to interest. In the early stages of a loan, the vast majority of the payment goes towards paying interest.
Interest
Interest is the amount you are charged by a lender for borrowing money. It consists of a percentage of the outstanding principal. Initially, the largest part of your mortgage payment goes toward paying off the interest. However, as time goes by and you begin to pay off your mortgage, more of your monthly payment goes toward paying down the principal and less toward paying off the interest.
Taxes
Most homeowners pay real estate taxes monthly as part of their mortgage payment. Your lender will then pass these on to your local county, city or state, to pay for municipal services, such as roads, schools, and police. Tax rates vary significantly from place to place. Checking local taxes rates in your area may help you in deciding where you can afford to live.
Insurance
Homeowners insurance protects your home and property against fire or other damages. Like taxes, insurance payments are paid to your company of choice by your lender. Depending of the location of your home, you may want to consider other types of insurance for specific risks. For example, if you live in an area with a high risk of flooding, you may need flood insurance for your home. The same holds true for areas at high risk for hurricanes or tornados. Other insurance that might be included in your monthly payment could be private mortgage insurance or PMI, if you purchase a home with less than 20% down.
Association fees
Some areas or communities may charge an association fee. This, like taxes and insurance, may be included in your mortgage payment. These fees are used for up-keep of common areas, such as pools or playgrounds, within your community. In some areas these fees may be very high and can increase your monthly mortgage payment by $100 or more.