It is useful to find out components of Massachusetts recurring mortgage payments to properly estimate home ownership costs. The acronym PITI is commonly used to remember the items included, which are principal, interest, taxes, and insurance. Not all loan payments will include all of these items. It will differ based on your specific loan.
Components Of Recurring Mortgage Payments
Principal is essentially the balance of the loan. For most loans, a portion of your mortgage payment every month is allocated towards reducing the balance, although there can be exceptions to this such as interest only loans. In the first several years of paying a loan, very little of the payment actually goes towards principal, but this increases over time.
Interest is the amount billed by lenders for use of their money. The interest rate is always a yearly rate but billed monthly according to the balance of the loan. Depending on your type of loan, the rate can stay the same for the entire life of the mortgage or it can fluctuate at specific periods of time.
Taxes are levied by Massachusetts according to the assessed value of real estate. The amounts are quoted annually but often due in installments. Overdue taxes become a lien on a property and supersede mortgage liens. Many banks will, therefore, ask homeowners to set aside funds into an escrow account to guarantee that the bills are paid. Those funds are collected monthly by the lender as part of the regular monthly payment. The lender then pays the taxes directly rather than waiting for the borrower to do so. It is a method of protecting their interests in a property.
There are different types of insurance that can apply to a mortgage. Hazard is typically mandated and mortgage insurance varies based on the specific loan. Both may be part of monthly loan payments.
Hazard insurance protects against damages. Lenders require this insurance since the home is collateral on the loan. Insurance premiums are payable yearly and many will want funds be put into escrow (similar to tax escrow). They will then submit payments to the insurance company directly to ensure the policy remains active.
Mortgage insurance is common for mortgages higher than eighty percent of the property value or sale price. It protects the mortgage company should a homeowner stop making payments. Lenders expect that they will not recover the full balance owed if it forecloses, so the mortgage insurance covers some of their loss. Although it protects the mortgage company, the borrower can be responsible for the payments.
Knowing Massachusetts Recurring Mortgage Payments
Not all financing is structured the same and therefore not all Massachusetts recurring mortgage payments will include all of the items above. There can also be other monthly expenses such as condo fees, which are not escrowed by mortgage companies but are a significant factor in calculating total monthly home cost. Remember that exact amounts are based on a specific home and interest rate, so any preliminary estimates will likely change.