Buying a home is done in stages, and hopeful homeowners should make sure they don’t overlook the period after they’ve been approved for a mortgage and have moved into their dream home. Wyndham Capital Mortgage wants to provide you with guidance on how best to budget your monthly finances so that you know where your money is going and why it’s going to a specific part of your mortgage.
Break Down the Whole
The first thing to do is look at the small payments that make up a single monthly mortgage payment, which is better than only focusing on the total monthly amount paid for a mortgage. Mortgages are broken down into:
One thing to note here is that not every home loan will have insurance, especially if the borrower paid more than 20 percent for a down payment. Be sure you also keep in mind the fact that amounts paid to each section can change on a monthly basis.
The principal portion of your loan is the amount you originally borrowed, and it’s the part you want to focus on should you ever have extra funds for your mortgage and want to pay more than your monthly requirement. Extra payments shorten the length of your loan and reduce the amount of interest you pay over the life of your loan.
Just like you have to pay interest on a car loan or credit card, the same applies to your monthly mortgage. Your monthly interest payment is determined by how much principal remains for your loan. Towards the beginning of your loan, more of your monthly payment is devoted to your interest, because you have more principal. As you continue to pay off your loan, your principal dwindles. While you still have to pay interest as the months and years go on, more of your monthly payment goes toward your principal.
Homeowners pay taxes on their property, the amount of which is determined by geographic location. For instance, if your property is worth $300,000 and your local property tax is 1.5 percent, you’ll pay $4,500 over the course of a year (broken down into $375 monthly payments. Rather than paying taxes every month like you do interest and principal, the amount is instead held in a separate escrow account until it’s time to pay it. Here we’d like to note that you’ll still pay property taxes even after you’ve paid off your loan, only you’ll pay them directly to your tax collector.
Most lenders require borrowers to have private mortgage insurance if the total loan amount is more than 80 percent of the home’s full value, which is why it’s best to save up as much as possible for a down payment. Private mortgage insurance absorbs some of the risk lenders take when doing business with borrowers who might default on their mortgages. Once your mortgage principal reaches 80 percent of your home’s appraised value or original purchase price, you have the option of canceling your private mortgage insurance.
Additional Considerations to Make
While budgeting for your monthly mortgage payment, there are additional factors to bear in mind. Homes need upkeep and maintenance the
same as cars do, which means you’ll want to start a home maintenance and repair fund and contribute to it every month. This way, you won’t be in a financial bind or have to take out a loan if you have roofing, plumbing, wiring or any other type of problem with your new home.
Buying a home is a huge and time-consuming undertaking. Breaking down the process and knowing where to devote your time, money and energy all contribute to making life easier and the home-buying process better.
Budgeting for your home is one thing. There is a lot that goes into buying a home. If you happen to be a first time home buyer, here's a checklist we've designed with you in mind to help guide you through the process. Click below to access.