The Anatomy of a Mortgage Payment

If you’re purchasing your first home, the chances are good you haven’t really thought much about a mortgage. In fact, at first glance, it can be shocking, mysterious, and elusive. If you want to be fully invested in cutting that big check every month, it may help to understand exactly where your money is going.

Show Me The Money

When you make a mortgage payment, you’ll find it tackles the two main parts of any mortgage.

Principal:
The principal amount is the monthly payment for the purchased house. If you make a mortgage payment, that means you didn’t buy the house straight up with cash. This figure indicates the amount borrowed from a lender within the allotted limit to have paid the lender back by. The first part of the mortgage payment is the principal amount divided by the life of the loan. This number is revised after each payment. It is important to note that other charges associated with having a mortgage payment are also included in this cost, such as annual fee, credit reports, and inspection fees to name a few.

Interest:
Interest is the amount of money that the lender charges the borrower for the time they are waiting to get their money back. This figure is determined by the type of loan you select and the Bank of England (in most cases). The higher the rate the bank is currently paying to borrow the money from the Bank of England, the higher your rate will be.

Other Costs of Home Ownership
It’s important to note that there are other costs associated with home ownership outside of the mortgage. You’ll need to carry buildings and contents insurance on your new home. In some cases, the lender may be able to add it to your bill, but you’ll want to shop around for the best coverage. You may also want to  carry mortgage protection insurance to help pay for the cost of your home should you be unable to afford the payment due to illness or an accident. Sometimes that, too, can be rolled in with the cost of your monthly mortgage, so check with your lender for details. You’ll need to factor in the cost of council taxes as well, though that typically can’t be part of your mortgage payment.

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