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Key takeaway
Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance. Making one payment to cover all four parts means you only have to remember one due date. More importantly, you are making progress on paying off your loan, protecting your home with insurance, and staying up to date on taxes, all at once.
Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance. If you’ve never owned a home before, you may be surprised that a mortgage payment has that many components. By including these costs in one monthly payment, your lender helps make things easier for you. Instead of separate bills and due dates for you to track, you have a system that helps you make sure these expenses are paid on time and in full.
Two of these components, property taxes and insurance, can be part of what’s called an escrow account. If you have an escrow account as part of your mortgage, part of your monthly payment funds that account, and then your lender pays your property taxes and homeowners insurance on your behalf when those bills are due. The benefit of this setup to you is that it can help you plan for those payments and make sure you have the money set aside for them so you don’t have to think about it. Learn more about escrow accounts
If your mortgage does not include an escrow account, you will be responsible for making the full payments on your property taxes and homeowners insurance when those bills are due.
This short video explains all the pieces that can make up your monthly mortgage payment and how, over time, your payment helps you protect and become the owner of your home.
When you borrow from the bank for your home mortgage loan, you have to pay it back over time in regular monthly payments. But in a way, making your mortgage payment is like paying yourself because over time you are building equity and ultimately total ownership.
Let's look at how this works. There are four components to a mortgage payment. Principal, interest, taxes and insurance. Principal is the amount of the loan. You pay down principal over the term of your loan. Interest is the cost of borrowing money.
The amount of interest you pay is determined by your interest rate and your loan balance, and the term of the loan. Taxes are the property assessments collected by your local government. Homeowners insurance is required financial protection you must maintain in case your property is damaged by fire, wind, theft or other hazards.
Mortgage insurance could be required if you need to make a smaller down payment. This means you can borrow a larger percentage of your home's value and the insurance protects the lender if you're unable to make your mortgage payment.
It's always best to speak to your home mortgage consultant to know exactly what you need. In the early stages of your mortgage term, only a small portion of your monthly payment will go toward repaying your original principal. As you continue to make payments through the years, a greater portion will go to reducing the principal that you owe and reducing the interest, while taxes and insurance will still be required.
Understanding the components of your mortgage and how they change over time puts you in a better position to manage it throughout your loan. Your Wells Fargo Home Mortgage consultant can talk with you about how to understand your bill, how to pay your loan down faster, and how building equity can help you in the future. They are here for you no matter what your needs or questions. So enjoy home ownership as you pay your mortgage and yourself every month.
Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A.
© 2014-2022 Wells Fargo Bank, N.A. NMLSR ID 399801.
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