UNDERSTANDING YOUR MORTGAGE PAYMENT

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When we think about a mortgage, the principle and interest are often all we consider. But there is much more that goes into a mortgage payment that you need to take into account. It is important to understand all the components of a mortgage payment to ensure that you are protected and can afford the monthly payment.

      ·         Principle – The principle is the actual loan amount that you borrow from a lender. In the case of owner financing, it is the sale price of the property minus the down payment. A portion of each monthly payment that you make goes towards the principle.

 In the beginning only a small portion of your payment goes towards the balance of your loan, while a majority goes towards the interest. Gradually, as time goes on, more of your monthly payment will be used to pay off the balance of your loan and less will go towards the interest. This is the standard way an amortization (or loan repayment) schedule works.

      ·         Interest – Although no one plans on defaulting on their loans, lenders take that risk when you borrow the money you need for your home. If you buy through owner financing the owner is taking a similar risk that you could default on payments in the future. The reward for taking this risk is the interest.

 Interest rates vary depending on how much of a risk is being taken, which is why credit scores, income to debt ratio, and job history are taken into account. In owner financing, interest rates are often higher because these factors may not play as important of a role in buying the house or may not even be considered at all, thus the owner’s risk is even higher. The good news is that even if you have poor credit, you can still buy a house.

      ·         Taxes – Yearly property taxes are also included in your mortgage payment. A portion of your payment is reserved in a special savings account called an escrow account. The property taxes are then paid at the end of the year. Setting aside a small amount of money every month to pay taxes at the end of the year reduces the financial burden of coming up with the entire amount at the end of the year and assures the owner that there will be money available to pay them.

Property taxes are assessed by state and local governments to fund schools, infrastructure and public services such as fire departments and police. These taxes vary depending based on location and market conditions and can change from year to year. The national average is $2000/year.

      ·         Insurance – As with property taxes, a portion of your payment will also go to paying for homeowners and/or flood insurance when it comes due. Homeowner’s insurance protects you and the lender against possible losses that could occur from things such as burglary, fire or natural disasters. If the home is located in a flood zone, you will also be responsible for flood insurance. As with property taxes, this amount can change from year to year.  

      Now that you have read about all the components that go into your mortgage payment, we will show you an example so you can see how it works using real amounts. In this example the loan amount is $100,000, 30-year term with a 9% interest rate.

PAYMENT
PRINCIPLE
INTEREST
PRINCIPLE BALANCE
1
$54.62
$750.00
$99,945.38
90
$106.21
$698.41
$93,015.25
180
$208.07
$596.55
$79,331.49
360
$803.32
$6.02
$0.00

As you can see in this chart, in the first payment, only $54.62 is being applied to the principle, but by the end of the term, almost the whole payment goes towards the principle. Also, the total principle plus interest stays the same at $804.62. But as discussed, the principle and interest are only a portion of what makes up your mortgage payment. 

Now we need to factor in the property taxes. For simplicity, property taxes for this home, will be $1,200/year. Divided by 12 months is $100/month. Now the mortgage payment would be $904.62.

In this scenario homeowner’s insurance is $1,800/year or $150/month. Because a majority of our readers are from Louisiana, where flood zones are common, let’s also assume that flood insurance in the amount of $660/year is required. That would be an additional $55/month. With the insurance added, your total monthly mortgage payment would be $1,109.62.

Principal  & Interest                                                               $804.62
Taxes                                                                                      $100
Homeowners Insurance                                                          $150
Flood Insurance                                                                      $55
__________________________________________________
Total Monthly Mortgage Payment                                     $1,109.62

Including all of the previously mentioned factors in a mortgage payment only serves to protect you and your home purchase. We specialize in owner financed homes, and would love to talk to you about getting you into a new house. You can see what we have available to sell at www.h2homessellerfinance.com

Let us be your Real Estate SOULution! – Where the Soul of Real Estate Meets Integrity & Experience.

Contact us:
www.ibuylouisianahomes.com          225-800-4445

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