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Home Mortgages: Understanding the Payment Structure

Mortgage Payment Structure

Home mortgages are long-term loans that allow families to buy homes without having to pay for the total cost upfront. Understanding the nature and payment structure of a mortgage is integral to making the best decision for your financial future:

Down Payment

When most families buy a home, they make a down payment of between five and 25 percent of the total cost. Experts suggest putting down 20 percent of the total costs in order to ensure that you have initial equity in the home. Paying for part of the home upfront also drastically improves your chances of getting a mortgage approved. If you put down less than 20 percent of your home’s cost, you will have to pay private mortgage insurance (PMI) in addition to your other costs. PMI reimburses your lender if you default on the loan. It can cost between .3 and 1.5 percent of the original loan per year. Once you have reached 20 percent equity, you no longer have to buy PMI.

Mortgage Payments

If you are approved for a mortgage, you will make monthly payments toward your lender in return for increasing equity in your home. In these payments, you pay off the principal, which is the cost of your home, in addition to the interest you owe the lender. Home mortgages come with both fixed or adjustable-rate mortgages (ARMs). The interest rate of ARMs fluctuates with the market and may be in your best interest if the interest rate is low and you do not plan on staying in your home for very long. Fixed mortgages, on the other hand, make it easy to budget and offer greater security.

Also note that, when you start paying your mortgage, most of your payment will go toward the interest rather than the principal. This structure means that you will gain equity in the home very, very slowly for the first half of your mortgage. If you would like to gain equity in your home faster, make sure that your mortgage allows you to prepay your loan, speeding up the process.

Other Factors

You can also bundle your property taxes, home insurance, and PMI into your mortgage payments. The government collects property taxes once a year, but you can pay them monthly with your mortgage. Your financial institution will set the money aside for you until payment is due. Home insurance is also mandatory to protect your assets from damage --- you can roll property insurance and your PMI into your mortgage payments, too.

When you buy a home, make sure that you not only calculate the cost of your mortgage, but your mortgage, insurance and any property taxes. Buying a home can be a wonderful investment for you and your family if you walk into it with transparency around your financial obligations.

Consumer Education Services, Inc. (CESI) is a non-profit committed to empowering and inspiring consumers nationwide to make wise financial decisions and live debt free. Speak with a certified counselor for a free debt analysis today.

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