Your monthly payment consists of several parts, including principal, interest, taxes, and insurance, referred to as PITI. Principal is the amount of money you borrowed and need to pay back. Interest is the cost you pay to borrow money from your mortgage investor (Fannie Mae or Freddie Mac, for example), calculated as a percentage of your principal balance. It represents the fee charged by the investor for providing you with the loan. Your local government assesses property taxes on your property based on its value. These taxes help pay for services like public schools, improvement projects, and police and fire departments. Insurance includes homeowners' policies, private mortgage insurance if applicable, and flood insurance if the property is located in a flood zone.
The principal amount is the original sum borrowed from your lender, and this amount does not change for the entire term of your loan. As you make monthly payments, the principal balance decreases, and the amount of interest you owe on the remaining principal also decreases. This process, known as amortization, ensures that over time, more of your monthly payment is applied to the principal and less to interest. While the total principal amount of your loan doesn't change, the allocation of each payment towards principal and interest does, leading to a gradual reduction in the outstanding loan balance.
Your mortgage loan servicer usually collects property taxes from your monthly payment and holds them in an escrow account. This alleviates you from having to come up with a lump sum payment at the end of the year when taxes are due. Your property taxes can fluctuate due to several factors, which can cause a change in your monthly mortgage payment.
Property taxes may increase if your property is reassessed at a higher value. Your local government determines how often your property is assessed. If your taxes change and your lender pays the difference on your behalf, your escrow amount will increase to make up for the shortage.
Changes in your Homestead exemption status can affect your tax obligations. Filing for an exemption may decrease your tax liability and could result in a reduction of the tax portion of your mortgage payment. On the other hand, losing your exemption status could increase your tax burden, making your payment go up. You should check with your local assessor's office to determine filing requirements in your area.
All home buyers with a federally-backed mortgage are required to obtain Homeowner's insurance. In some cases, you may also be required to pay for private mortgage insurance (PMI) and/or flood insurance. Your loan servicer will collect these premiums as part of your monthly mortgage payment and hold it in an escrow account, just as they do with your property taxes.
Homeowners insurance policy rates can vary, often rising annually. Premiums may increase due to company price hikes or frequent claims, which can raise your mortgage payment. If you do not secure sufficient coverage, your lender might impose a force-placed policy to protect their investment, adding these premiums to your mortgage payment. These lender-imposed policies are generally more expensive than those you can find on your own.
If your property is located in a flood zone, you will be required to purchase a flood insurance policy through the National Flood Insurance Program (NFIP) administered by FEMA or through a private company. Recent changes in the NFIP's methodology for calculating flood risk have led to significant increases in premiums for some homes in Special Flood Hazard Areas (SFHA), affecting the costs of their mortgage payments.
Private mortgage insurance is usually required if your downpayment is less than 20% or if you financed your home with a specific loan product such as an FHA loan. If you have paid down your mortgage to a certain percentage, you may be able to remove PMI, lowering your mortgage payment. Some mortgages require PMI to be paid for the life of the loan.
Property taxes and insurance are necessary parts of owning a home. By staying informed about potential fluctuations in these policies, homeowners can anticipate changes in their monthly housing costs, ensure they are prepared to negotiate the complexities of homeownership with confidence, and maintain stability in their financial planning. For nearly a century, Standard Mortgage Corporation has assisted homebuyers through every step of the mortgage process, helping them achieve their dream of homeownership. Contact one of our expert loan officers today.