If you're planning to buy a home in Berks County, then you may have already realized there's a lot to learn about the process. One of the things you should learn first is what makes up your monthly mortgage payment. When you know what expenses you'll be covering each month, you'll have a better idea of how to adjust your budget and how much you can afford.
What Your Mortgage Payment Covers
Your monthly mortgage payment is made up of four parts: principal, interest, taxes and insurance (often abbreviated as “PITI”). Once you have been approved for a mortgage, your loan officer will work with you to determine the amount and terms of your loan. They will then calculate your mortgage payment based on these four components:
- Principal is the money you borrow to purchase the home. A portion of the principal is usually paid off with each mortgage payment and reduces the outstanding balance you own, which increases your home equity.
- Interest is the amount a lender charges you for borrowing the money to buy the home. Many factors determine mortgage rates, but usually the interest rates can vary according to risk. Items that affect your interest rate include credit score, down payment, loan program, loan type, property type and loan to value.
- Taxes are annual property taxes you pay as a homeowner to local governments to fund public services (community schools, roads, police, etc.), and are usually a percentage of the assessed property value. Before buying a house, be sure you understand what you can expect to pay for local property and county taxes.
- Insurance refers to your homeowner’s insurance and helps protect against financial loss from fire, natural disasters or other hazards. If you’re financing your home with a mortgage, you’ll be required to have this insurance. Also, keep in mind if you're making less than a 20 percent down payment, you'll most likely need private mortgage insurance (PMI) which protects your lender if you stop making payments on your loan.
Keep in mind that many loan quotes will only include the principal and interest. Taxes and insurance also need to be factored into the monthly payment.
Your Escrow Account
If you're buying your first home in Berks County, it can be overwhelming to think about all of these expenses. You can keep yourself organized and make sure you have the funds needed if you set up an escrow account. In fact, your lender may require you to have one if you're putting less than 20% down on your home.
An escrow account can be a good thing to keep your payments in order. You pay your lender 1/12 of your annual real estate tax bill, homeowner's insurance, and PMI (if you need it) premium each month, along with your regularly scheduled payment. The lender then holds the funds and distributes them to your county assessor and insurance companies as the payments are due. This will make sure everyone is happy.
Making your monthly mortgage payment is a bit more complicated than making a rent payment. But it's worth it. You're building equity in your own home, and not someone else's.
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