Learn exactly what goes into your monthly mortgage payment. We'll explain principal, interest, and escrow contribution in a clear simple way. You'll never wonder why your monthly mortgage payment went up again.
Monthly Mortgage Payment is Step #9 in our New Home Buyers Guide. Learn more here: https://www.newhomebuyersguide.net
Overview of this video:
When you make your monthly mortgage payment, you’re actually paying your mortgage company for 3 different things:
The part of your monthly payment that goes toward paying down your debt.
The part of your monthly payment that goes to the mortgage company for the ability to borrow their money
3. ESCROW ACCOUNT CONTRIBUTION
The part of your monthly payment that goes toward paying your property taxes & homeowners Insurance.
If you have a Fixed Rate Mortgage, then the only time your monthly mortgage payment should change is if your property taxes or your homeowners insurance increase.
WANT MORE? Our New Home Buyers Guide Workbook & Course will walk you through all 9 steps of the home buying process. Get them at https://www.newhomebuyersguide.net
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I'm experiencing a major increase in my escrow currently. It increased my total mortgage payment by 50%. I bought 2 years ago and yes the area I am in is up and coming, so the city taxes have gone up, but shouldn't they have adjust this within the first year? The city said some of what i am paying now in this increase is to pay back what I should have been paying last year. Is this normal? Do I have any right to argue this? Please help!
Really sorry to hear you're dealing with this. Here's what we would do:
1. Ask your mortgage company to send a complete breakdown of your escrow contributions and the payments that have gone out for property taxes and insurance.
2. Since your so close to the original purchase date, make sure it includes your original contribution from the home closing. There likely was a lump sum that was paid into escrow at your closing. You should have paid insurance and property taxes as a part of the closing too. If that didn't happen it could cause this issue. The title company or your realtor should be willing to help you understand what you did or didn't pay.
3. Analyze this information. Make a spreadsheet of what you put in and what got pulled out.
Some of the causes could be:
- Too low of an estimate for insurance
- Too low of an estimate for property taxes
- increase in insurance cost
- increase in property taxes
- not enough paid for these things at closing
4. Once you pinpoint the issue, see if you can do anything about it. You can argue the property valuation done by the city/county, look at other insurance options, etc. There may not be much you can do but it's worth considering.
5. Once you're clear about everything, there are two ways to handle this:
- You can simply accept that your mortgage will be higher.
- You can make a lump sum contribution to the escrow account. This will address the issue without raising your monthly mortgage payment so much.
In the end though, if your insurance and property taxes are simply much higher than a year ago, it's likely that your mortgage payment will stay higher. A 50% increase does seem pretty extreme though.
Hope this helps at least a little.
Great question. There are some mortgage companies that will let you pay for insurance on your own. In these cases you can pay it up front, monthly, or however you want to. But the vast majority in mortgage companies require that you pay for insurance and property taxes through your mortgage escrow account. The main reason for this is so they can make sure there's an insurance policy on the house and the taxes are paid up. The house is their investment too so they don't want the house to burn down with no insurance. That's the biggest reason.
Good video but from your example for $150,000 house at 4% interest where did you get the $900 from? How do you know the total monthly starts at $900? Can you increase the principal from the start and go over the $900 monthly payment if you wish to do so?
Great questions Guillermo. If you were able to pay off a mortgage in 20 years instead of 30 you'd save a TON in interest. The question is, has your mortgage company set up the loan to make it harder to do this? Some mortgages only allow you to make one monthly payment. Others have prepayment penalties. No matter the rules you definitely benefit from paid the loan down more quickly but it's important to understand exactly how YOUR loan works.
My sister mentioned that when you phone in an extra payment, like if you run into some money, that you can tell the lender to place it on the principal. Does this work? Would the borrower still owe the same amount in the end even if they pay off the loan in 20 years instead of 30?
Hi Vue Lor. Our example was definitely an estimate. Mortgage calculators factor many pieces including principle, interest, taxes, insurance, and the duration if the loan. The $900/month is likely close for a 30 year mortgage on a $150,000 home with a 4% interest rate. If you want to pay more principle, most lenders would advise you to consider a 15 year mortgage rather than a 30 year. You can save a TON of money in interest by going that way.
solid snake if that's happening every six months then there's a major issue with your insurance and property taxes skyrocketing. But yes, if yer insurance and property taxes increased by that much your mortgage payment would reflect it.
Thanks FortNikitaBullion, Grammar police definitely have us handcuffed on that. We'll fix it in the next update. We're the teacher and you're the....principal :) Hopefully this video was helpful even if the principle content was misspelled.
Hey Robert, great question. An escrow account is like a bank account so the money in it is yours. At the end of the loan (or when it's paid off) the bank will send you a check for anything left in your escrow account.
2014FivePointOh Totally agree with you and sorry if that didn't come across in our simplified explanation. Yes, each month you pay basically one-twelfth of the annual interest. Early in the loan that can be a majority of your monthly payment. As the loan ages, less interest is paid meaning more principle can be paid. Thanks for checking in and clarifying!
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