Practically everyone who purchases a home in Chicago has a mortgage. Although most first-time homebuyers know that financing the purchase means that they will be making a monthly mortgage payment for decades, they don’t always understand that these payments are more than simply a percentage of the sale price.
In this blog, we’ll explain the four major expenses in your mortgage payment: the Principal, the Interest, the Taxes and the Insurance, or PITI for short, and how they may change over time.
Principal
The principal pays down the balance that you owe. With a fixed-rate mortgage, the actual monthly payment remains the same but in the beginning, the portion that goes toward the principal is comparatively small. Over time, the amount applied to the balance gradually grows.
Interest
The interest you pay on the mortgage is based on the interest rate approved by your lender prior to closing. Initially, interest will account for a high percentage of your monthly mortgage payment, but as you pay down the balance, the interest portion goes down and the amount allotted to the principal balances goes up, unless you have an adjustable-rate mortgage.
Taxes
Your lender factors the cost of property taxes into your mortgage payment. The general formula is the annual amount due divided by 12. The amount owed for property taxes is typically held in an escrow account and paid by the lender when the tax bill comes due. It is important to note that even with a fixed-rate mortgage, the monthly amount you pay for taxes can fluctuate due to changes in tax cost.
Insurance
Lenders won’t normally finance your home purchase unless you acquire homeowners’ insurance first. Your lender will collect and remit this portion of your mortgage payment to the insurer to provide ongoing protection against property damage.
In some cases, mortgage payments also include private mortgage insurance, which protects your lender should you default (typically, when you fail to make payments or do not catch up past-due amounts). This type of insurance is usually applied when you make a lower down payment and it disappears from your monthly payments once you reach a certain amount of equity in the home.
Are Taxes and Insurance Optional?
Typical mortgages consist of the PITI formula but some homeowners choose to take out mortgages that don’t include property taxes or insurance in the monthly payments. While this lowers the amount you pay each month, you are still responsible for paying taxes and insurance yourself and shall have to make lump sum payments with your own funds usually twice a year at a minimum.
Discuss Your Next Mortgage With an Indiana and Illinois Real Estate Attorney
At Auricchio Law Offices, we serve a diverse clientele in and around Chicago, including northwest Indiana, ranging from individual homebuyers and small businesses to condominium buildings and large commercial properties. We will provide you with the advice you need to make an informed decision about your mortgage options, so please contact us today.
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