As you're searching for your ideal new home, it's important to understand a little more about how you'll finance your dream home. One area of confusion for many is the monthly mortgage payment.
Your monthly mortgage payment consists of more than just the loan amount plus interest. Taxes and insurance are other expenses that may be factored into the payment.
Most lenders require you to pay a calculated amount each month into an escrow account, out of which the lender will pay the property taxes and various insurance premiums, such as homeowner’s, flood, and windstorm, when due. This is helpful in terms of budgeting for these items because your lender is saving this money for your benefit and will pay those bills.
Another amount that may be added to your mortgage payment each month is private mortgage insurance (PMI). If you put down less than 20% of the purchase price of the home when it's purchased, the lender may require this insurance, which will cover the lender in the event of foreclosure. PMI is typically 1% of the loan amount and can usually be canceled and removed from the loan once your home value increases and you have at least 20% equity.
It's very important to consider these additional expenses when deciding how much to spend on your new home. Depending on where your new home is located, these additional amounts can represent a significant portion of your entire mortgage payment.
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