If you’re a homeowner or are thinking about buying one, it is important that you know the different elements that make up your monthly mortgage payment.
First, the two main components of your monthly mortgage payment are the principal portion of the loan and the accrued or overdue interests for that specific monthly term. This means that every time you make a mortgage payment, you are paying a portion of the total amount of the loan you took and a percentage of the interest that have accrued up to that point.
But there are other components that may exist in mortgage payment, and it is the portion that is commonly known as escrow. In this item you accumulate for the payment of the insurance on your property, such as the Hazard insurance and the portion that you accumulate for payment of taxes on your property, if applicable. There may be other components in the escrow account, if a Flood policy applies to your property, you have a payment for mortgage insurance (MGIC, Rural FHA or housing) and/or if you have voluntary insurance premiums (life policy, illness or job loss) that covers part of your mortgage payments or up to all of the debt.
Your mortgage payment may change over the life of the loan. This happens because your insurance premiums can change, as well as the amount of property taxes. The financial institution performs an annual escrow analysis to determine whether to change, increase or decrease, your total monthly payment to cover any deficiency or excess.
Sometimes, if the insurance and tax payments have increased, the banks advance the payment by contributing the difference, which creates a deficiency in the escrow account. In this instance, your monthly payment will increase, but not because you pay more principal or interest, but because you have to cover that deficiency created by the contribution made by the bank in the payment of insurance or contributions. It is worth mentioning that the bank is not obliged to do this.
It is important to understand the components of the monthly mortgage payment so that you can plan your budget and make necessary adjustments in case there are changes in insurance and taxes. Also, remember that it is always important to communicate with your financial institution to clarify any doubts and receive advice about your mortgage. Buying a home is a big investment, but with the right information, it can be a rewarding experience!
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