At California Mortgage Advisors, we understand that many lenders make the mistake of assuming their customers are more familiar with the lending process and how monthly mortgage payments are factored than they are. This leads to frustration on the part of the borrower as they feel like their lender is intentionally misleading them or withholding information. At CMA, we are dedicated to transparency and clear communication with our current and potential customers. Our Mortgage Advisors will do everything in their power to make sure borrowers understand how every facet of their loan is calculated and where their monthly payments are going.
A portion of every monthly mortgage payment goes towards paying off the principal of the loan. The principal is often the easiest part of the monthly payment for most people to understand because it represents the portion of the payment that goes towards the balance of what was initially borrowed. However, the structure of principal payments can often be confusing or alarming, especially for first-time borrowers. The only exception is interest only loans which do not require principal payments.
If a borrower obtains a conventional loan with a fixed rate, they are going to be paying the same amount on a monthly basis for the entire life of the loan. However, the percentage of the total monthly mortgage payment that is applied to the principal amount changes over the life of the loan. During the initial years of a conventional loan, the principal payment represents a relatively small percentage of the total monthly payment. As the loan matures, the percentage of the total monthly payment applied to the principal increases.
Interest is often described as the “cost of doing business”. Essentially, interest is the income that the lender generates on the loan for assuming the risk of lending to the borrower. Individual interest rates are determined by the loan program, the borrower’s credit and financial history as well as current economic trends.
The most important part of interest as it relates to the individual monthly payment is the relationship between interest payments and principal payments. Essentially, interest payments operate in the exact opposite manner of principal payments. Interest payments represent a significant percentage of the monthly mortgage payment at the start of the loan and a relatively minor percentage as the loan approaches maturity.
Real Estate taxes are assessed and collected by local government agencies. Total yearly taxes are determined using a combination of the total value of the home and criteria determined by the individual governmental agency. They are non-negotiable and often fluctuate wildly from region to region. The monthly tax payment represents one-twelfth of the annual tax bill for the home in question. A borrower may pay the taxes on their own which are usually due in two installments during the year or they may open an escrow account with the lender and build the taxes into the monthly mortgage payment. If the borrower pays the taxes to the lender, the lender will pay the taxes when they are due from the escrow account. Either way, the monthly average tax expense should be considered as part of the monthly overall payment.
The first type of insurance that may appear on a monthly mortgage statement is homeowners insurance. This is insurance that guarantees replacement of the home and all applicable contents in the event of a catastrophic accident or natural disaster. Premiums are determined by insurance companies on an individual basis. Borrowers are free to shop around and obtain a policy that best suits their specific needs. Like real estate taxes, the monthly payment represents one-twelfth of the yearly insurance bill. The insurance can be paid by the borrower or paid to the lender each month and held in an escrow account by the lender until the yearly premium is due.
The other type of insurance payment that may appear on a monthly mortgage statement is mortgage insurance. Mortgage insurance is designed to protect the lender in the event that the borrower defaults on the loan. It is only necessary in situations in which the borrower makes a down payment less than 20% of the total value of the home.
Homeowners Association Dues
If a borrower purchases a condominium or home in a newer development, they may have special monthly, quarterly or annual assessments. These dues cover the cost of maintaining and insuring the property or development. HOA dues are not part of the monthly mortgage payment paid to the lender, however these fees must be considered by a borrower before buying a new home or condo.
The best way to fully understand your current monthly mortgage payment or potential monthly mortgage payment is to speak with a CMA Mortgage Advisor today. It is important to us that our clients and potential clients fully understand where their money is going and what they can do to obtain a monthly payment that best reflects their personal financial paradigm.
Our Mortgage Advisors are available at (800) 927-6560 to answer your questions or click here to contact us online.