It is useful to understand what makes up PA recurring home loan payments for budgeting purposes. The acronym PITI is commonly used to remember the items, which are principal, interest, taxes, and insurance. All loan payments do not automatically include each of these. It will differ based on your specific loan.
What Makes Up Recurring Home Loan Payments
Principal Contributions
Principal represents the balance of your mortgage. For a typical loan, a portion of your monthly payment is put towards reducing the balance, however 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.
Mortgage Interest
Interest is the amount charged by lenders for use of money they lend. The interest rate is typically a yearly rate but assessed monthly calculated on the balance of the loan. Based on the loan type, the interest rate may stay the same for the full life of the loan or it may change at certain periods of time.
Taxes
Taxes are levied by PA according to the assessed value of a property. The amounts are calculated yearly but traditionally due in installments. Overdue taxes become a lien on a property and supersede mortgage liens. Many banks will, therefore, require homeowners to set aside funds into an escrow account to ensure that the bills are paid. Funds are collected monthly by the lender as part of the regular mortgage payment. The lender then pays the taxes directly rather than relying on the borrower to do so. It is a way of protecting their investment.
Insurance
There are different types of insurance that may apply to a home. Homeowners is typically required and mortgage insurance depends on the specific program. Both can be part of recurring mortgage payments.
Homeowners insurance protects against damages. Lenders require this insurance to protect the collateral on the loan. Insurance premiums are payable annually 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 does not lapse.
Mortgage insurance is common for financing with low down payments. It protects the bank against losses. Lenders estimate that they will not recover the full amount owed if it forecloses, so the mortgage insurance covers part of their loss. Even though it protects the mortgage company, the homeowner is responsible for the premiums.
Knowing PA Recurring Home Loan Payments
Not all financing is structured the same and therefore not all PA recurring home loan payments will include all of the components above. There can be additional monthly charges such as condo fees, which are not escrowed by mortgage companies but are a significant factor in estimating total monthly home expenses. Remember that final amounts are based on a specific home and interest rate, so any preliminary figures are likely to change.