Tracie DeMars
ReMax Equity Group
traciedemars@aol.com

   There are four parts to your mortgage payment…it is called a PITI payment.  What that means is Principal, Interest, Taxes, and Insurance.  For example, if my payment was $2000, my principal/interest portion would be about  $1300 a month, and the other $700 a month would be put into an escrow account.  Out of this account comes the homeowners insurance payment once a year, and property taxes are also paid from this account twice a year.  All of these fees are wrapped into the monthly mortgage payment.  Anytime you are using a FHA, or any government type of loan like RD (USDA), or the downpayment assistance programs & grants (like Home Advantage), these fees must be wrapped into the mortgage payment.   If you don’t have a 20% down payment (like 99.9% people), then your mortgage payment will actually have FIVE PARTS with the fifth part being Mortgage Insurance. Another insurance that ‘could’ come out of the escrow payment is flood insurance.  If you live in a flood plain (I used to), then you will be required to carry flood insurance.  Flood insurance would be wrapped up into your mortgage payment, and be deposited into your escrow payment for a payment once a year.

So what’s an escrow account?

Your escrow account, as mentioned above is the account that holds the money taken from your mortgage payment every month to pay for those parts of your mortgage that are NOT principal and interest.  Every year your mortgage company will evaluate your escrow account to be certain that they’re collecting enough to pay for these items.  As property taxes go up (or down) based on home value, your home owners insurance should also change to cover your homes value.  If your values are going up, then the amount you need in your escrow account will also need to increase.  You will receive a letter from your escrow account every year to update you whether you have enough in your payment to cover escrow, or if you have too much in your escrow account.  If you have too much in your escrow account then you might receive a check, and new payment amount.  If you don’t have enough forecasted in your account, then they will ask you to mail in a check to cover the difference, or your mortgage payment will be adjusted to cover the difference.

 Mortgage insurance is different than home owners (sometimes called, Hazard) insurance.  In a nutshell, mortgage Insurance protects the lender in case you default on your loan, and homeowners insurance protects you & the lender in case something happens to the home….ie.. a fire, a tree falling on your home, a car driving into your home, burst pipes, etc.

   Now, please remember, you do choose your insurance company!  One of the things I suggest to clients is to contact their insurance company after they make their offer and to do a couple of things…(1) Has there been any water of fire claims in the past 3-5 years on this home?, and (2) How much would the insurance be for this home?  Average homeowners insurance is about $500-$700 a year….again, it is wrapped up into your monthly mortgage payment so it is NOT another extra expense.  You do get to choose your company, and many companies will give you discounts for ‘bundling’ your policies…like, home, car, life, etc.  It doesn’t hurt to call around for quotes.  Once you choose a company, you will want to request that your insurance agent send over an ‘insurance binder’ over to your lender.

  Taxes are decided by the county, and are usually paid twice a year. You may get a copy of the tax bill, but again, it is paid by your mortgage company out of your escrow account.  I always get phone calls when these bills come out.  😀  No worries…it is just for your records, and I encourage your phone calls!!  🙂  Please remember that ‘Tax Assessed Value’ is NOT market value.  Property taxes are assessed every year, but based off of sales from a year to two years prior.

   Now…your principal and interest portion of your mortgage payment.  As we know a portion of your mortgage payment every month goes toward the principal amount that your borrowed to purchase your home, and a portion goes toward the interest that the lender is charging you.  In the beginning of your loan the smaller amount goes toward principal, and the larger portion goes toward interest…this eventually switches.  We all know the wisdom of making an additional payment every year on your mortgage to reduce your loan time.  Some banks will offer to take your payment in two week portions, and make your additional payment for you.  Honestly I don’t advise this…..before you think I am crazy, this is the reason why….the bank actually holds your money and makes your additional payment at the end of the year.  This isn’t the best way for you, really….  I always pay between $25-$100 extra on my mortgage every month depending upon our finances that month, but apply it directly towards my principal borrowed amount.  At the end of the year I have made that extra payment directly towards my principal, which is less money I can be charged interest on!  This will shorten my loan length considerably.  In the end I actually pay MORE on the principal amount than I would have if I had just made one extra payment.  My suggestion to all my clients is to take that $20 from each paycheck and put it into that credit union far away (with no debit card or checkbook for) that is for your home repairs that are needed as a homeowner.  If you just put at least $25 per month extra toward your principal loan amount you will also be shortening your loan time.  This sounds like a lot…but really is it?  It is a trip to McD’s (for my family anyhow as we have 2 adults, a third grader, and either my adult son, and/or my adult daughter and her husband, and baby.), or a couple of Dutch Brothers trips a month…but it will help you in the long run immensely.   I won’t lie… I love my Dutch Bros though.  🙂

   So there are the 5 parts of your mortgage payment…Principal, Interest, Taxes, and Insurance…both Mortgage & Homeowners…..all tidily wrapped up into one payment every month..

  Yay!  I kept it shorter this week!  😀  It’s like going to the grocery store, and only coming out with the items you went in for….ok, who am I kidding…that never happens!