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Understanding your mortgage payment

Understanding your mortgage payment

Knowing more about what makes up your mortgage payment can help you save money—and reduce the term of your loan.

For most people, buying a home is the biggest and most complicated financial transaction of their lives. Mortgage payments can also be big and complex, with multiple parts that can change over time.

Your mortgage payment is arguably the single most important payment you make. So doesn’t it make sense to understand its various parts? The good news is that when you understand the components of your mortgage payment, you may be able to use that knowledge to reduce your payment—and even decrease the term of your loan.

Let’s take a look at some common questions about what goes into your mortgage payment, and how you can use that knowledge to your advantage.

What makes up a mortgage?

Your mortgage is a long-term legal agreement between you (the borrower) and your lender. Your lender loans you the money you need to buy the property you want, so you don’t have to come up with all the cash out of pocket. In return, you agree to pay back your loan with regular payments (usually monthly).

But in addition to repaying the principal (the price you’re paying the seller of the property), you also have to pay interest to your lender. And in many cases, your mortgage payment also includes the funds needed to pay your property taxes, your homeowner’s insurance, and (possibly) other fees.

What are the parts of my payment?

The four main parts of your mortgage payment are principal, interest, taxes, and insurance (PITI). Principal and interest make up most of your payment, so some lenders refer to your payment as simply “P&I.” As we discuss the various parts of your payment, we’ll use a $100,000 mortgage as an example.

  • Principal (the amount you borrowed to buy your property). This part of your payment goes to pay down your loan balance (how much of the principal you owe to your lender). If you borrow $100,000, the principal (before you make any payments) is $100,000.

When you begin making mortgage payments, the part of your payment that goes toward principal is very small. But over the life of your loan, that amount increases.

  • Interest (the percentage of the principal amount that you pay over the life of the loan to your lender). It’s the fee your lender charges for lending you money—which is how lenders make money from loans. The part of your payment that goes to interest starts out high but decreases as you pay down your principal.

Note that a higher interest rate means a higher payment. For example, if the rate on our $100,000 mortgage is six percent, your P&I for a 30-year loan would be $599.55 ($500 interest + $99.55 principal). That $100,000 loan at a 9% interest rate would have a monthly payment of $804.62.

For a fixed-rate mortgage (where the interest rate remains the same for the life of the loan), the amount that goes toward interest decreases as you make payments, and the interest rate stays the same. But if you have an adjustable-rate mortgage (ARM), the amount you pay toward interest can change because we adjust your interest rate from time to time based on then-current industry indexes (refer to your mortgage agreement for details). So depending on market trends, your ARM interest rate could go up or down—which will change your payment.

  • Tax (your property tax). Wherever you live, you have to pay tax on your property—which your local government uses to fund public services such as schools, police forces, and fire departments. The amount you pay is typically a percentage of your property’s assessed value (which is usually less than its true market value). So if your property’s assessed value increases, your property tax goes up. You paid your first years’ worth of property tax as part of your mortgage closing costs.

Does your loan have an escrow account? Most mortgages do. If so, every month we’ll add one-twelfth of your estimated annual property tax to your P&I payment. Then when your next tax bill comes due, we’ll pay it directly from your escrow account. Learn more on how your escrow accounts works.

  • Insurance. (your homeowner’s insurance; also called “hazard” insurance). It’s an insurance policy you pay for that protects your home and its contents from fire, theft, and other kinds of loss. You paid your first years’ worth of insurance payments as part of your mortgage closing costs.

If your loan has an escrow account, every month we’ll add one-twelfth of your estimated annual insurance costs into your P&I payment—just like we do for your property taxes. Then when your next insurance bill comes due (typically twice a year), we’ll pay it directly from your escrow account.

What about private mortgage insurance (PMI)?

PMI may be included in your payment; sometimes it’s not. PMI is an insurance policy you pay for that’s almost always required if you make a down payment of less than 20% of your loan’s principal amount. PMI doesn’t protect you—it protects your lender by covering their expenses in case you fail to repay your loan and they’re forced to foreclose on your property and sell it.

Depending on the specifics of your mortgage agreement, the cost of PMI may be included in your regular mortgage payment. Or you may have paid it as a single, upfront payment at closing—or a combination of both. (There’s also lender-paid PMI, for which you pay a slightly higher interest rate on your mortgage for the life of your loan instead of paying a monthly fee.)

It may be possible for you to cancel your PMI coverage before the end of your loan term—but that depends on the kind of loan you have, how long you’ve had it, how much you’ve paid down your loan, and several other factors. Review your mortgage agreement to find out the PMI specifics for your loan. Learn more about the basics of PMI.

What is an escrow account?

One of the duties of homeownership is paying for property taxes and homeowner’s insurance (also called “T&I”). To help make sure you can pay those bills, your lender may have set up an escrow account for you. Unless your down payment was 20% or more, your loan probably has an escrow account.

Here’s how it works: Your escrow account is like a savings account that we manage for you. However, no one earns interest on the funds in your account, and only we can withdraw any money out of it. We use your account to collect money so we can pay your T&I bills for you when they come due.

If you have an escrow account, you paid two months’ worth (one-sixth) of your estimated annual T&I expenses when you closed on your mortgage. That amount is called a “cushion,” and it’s a little extra that helps cover you if your T&I bills end up being higher than we expect. After closing, you started paying one-twelfth of your estimated next year’s T&I costs every month, along with your regular P&I mortgage payment (about 1/26th of the total if you make bi-weekly payments). By paying a little with every mortgage payment, we have enough to pay your T&I bills for you when they come due.

Remember: T&I costs can change from time to time (usually they increase). When that happens, your mortgage payment will change because we’ll change the amount you pay into your escrow account. We always notify you in advance about any changes in your escrow account and your mortgage payment.

Not all mortgages have an escrow account. If your loan doesn’t have one, then you have to pay your T&I bills yourself. So be sure to plan ahead and save up so you can pay them when they come due.

To learn more about escrow accounts, refer to our FAQs, or check out this helpful article on our website.

What is amortization?

“Amortization” is a technical mortgage term that refers to how you pay off a loan over time. Your amortization (or “payoff”) schedule is a mathematical table that you were given during your mortgage closing; it shows the amount of P&I that goes into each of your mortgage payments.

You may recall that early in your mortgage, you pay more interest than principal. But as time passes, that reverses. By the end of your loan term, you pay more principal than interest.

We use a math formula to calculate your amortization schedule. Without going into detail about the math, let’s look at a few of the 360 payments from our $100,000, 30-year mortgage with a six-percent interest rate. This partial schedule shows how what you pay in principal and interest reverses over time:

Partial amortization schedule

$100,000 mortgage |  30-year term (360 months)  |  6% interest rate  |  Monthly payment = $599.55

Monthly payment number

Principal

Interest

Remaining principal balance

1

$99.55

$500.00

$99,900.45

12 (1 year)

$105.16

$494.39

$98,772.00

180 (15 years)

$243.09

$356.46

$71,048.96

360 (30 years)

$597.00

$2.99

$0

As the table shows, each payment is $599.55, but the amount we apply to your P&I changes every month. At the start of your mortgage, the rate at which you gain equity (pay down the principal) is much slower than it is toward the end of your mortgage term. This is why it can be a good idea to make extra principal payments (if your mortgage agreement allows you to do so without a prepayment penalty). Extra principal payments reduce the amount of principal you owe, which also reduces the interest due on each future payment. And that moves you toward your ultimate goal: paying off your mortgage.

When do my payments begin?

For most mortgage loans, your first mortgage payment is due at least one full month after the last day of the month in which your home purchase closed. Unlike rent—which is due on the first day of the month for that month—mortgage payments are paid in arrears. That means they’re due on the first day of the month, but for the previous month.

For example, if your mortgage loan closed on January 25, your closing costs would have included the interest charges for the seven days through the end of the month (January 31). But your first full mortgage payment—including interest and principal for the month of February—would be due March 1.

Every month after that, your mortgage payment is due on the first of the month. So to help ensure that you avoid late fees and missed payments, be sure we receive your payment no later than 3:00 p.m. on your due date. To learn more about the importance of paying on time, refer to this article on our website.

Note: The payments for some mortgage loans are due on a different day than the first of the month. Check your mortgage agreement or your mortgage account statement to verify your specific due date.

How do I make my payments?

Now that you have an understanding of what makes up your mortgage payment, let’s look at how to make your payments:

  • When do I pay? Should you pay monthly? Or biweekly? Monthly payments are the most common way to repay your loan. But your lender may give you the option to make biweekly payments. There are two benefits to biweekly payments: First, each payment is more manageable because it’s about half of your monthly total. Second, by paying every two weeks, at the end of the year you’ve made 26 biweekly payments—which is equal to 13 monthly payments.

When you make 13 monthly payments every year, you end up paying less total interest—and you reduce your principal more quickly than paying monthly. For example, let’s say you have a 30-year fixed-rate loan for $250,000 at 4% interest. Making biweekly payments for the life of the loan would save you almost $30,000 in interest expenses, and you would pay off the loan in 25 years.

Even if you stayed in your home only seven years, you would still save several thousand dollars in interest expenses—while paying down $10,000 more in principal than if you paid monthly.

  • What method should I use to pay? Everyone manages their finances differently, so we offer a variety of payment methods, including:

Automatic withdrawal of your payment from your bank account is the easiest and most convenient way to pay. With autodraft, you’ll never be late—and you’ll never miss a payment. If your loan was transferred to us from a previous servicer, your autodraft arrangements most likely carried over to us when your loan transferred—but check the “welcome” letter we mailed you to make sure.

With autodraft, we’ll deduct your payment from your account on the date you specify, so after you set it up, you won’t have to do anything else. But for autodraft to work, we need accurate bank-account information. Unfortunately, one of the main reasons we get late payments is because homeowners give us invalid autodraft info. So when you set up autodraft, double-check your bank routing number and your bank account number to make sure they’re correct.

Setting up monthly autodraft payments with us is easy: Just fill in a simple form that you can download from our website. To set up monthly payments, download our Automatic Payment Enrollment Form. Or to set up biweekly payments, use our Biweekly Automatic Payment Enrollment Form. To learn more about the benefits of autodraft payments, refer to this helpful article on our website.

  • Online bill-pay. If you prefer, you can use the online bill-pay service offered by your bank—or any other online bill-pay provider. Just enter the correct payment amount and set your payee name to Shellpoint Mortgage Servicing. Also, if you have an escrow account or an ARM loan, be sure to track any changes in your payment amount and adjust your bill-pay amount before your payment is due.
  • If you’ve set up an online account with us, one of the many conveniences we offer is the ability to make mortgage payments through our website. Use this link to register your online account. Enter the username and email address of your choice; then click on Create Account and follow the on-screen prompts and instructions.
  • You can also pay using our automated phone system. Or if necessary, you can speak with a live Customer Care representative. Either way, call us toll-free at 800-365-7107.
  • Check or money order. Want to go low-tech? We don’t accept cash payments, but we’ll gladly take your check or money order. If you get paper statements from us, be sure to include your payment coupon with your payment. Also, remember to write your Shellpoint loan number on your check or money order.

How can I build equity?

Here’s great news: The more you pay toward your principal, the more equity you gain in your property. What’s equity? Basically, it’s the appraised value of your home minus your outstanding principal balance. Equity increases over time as you pay down your mortgage loan—or as you add value to your home through improvements or rising property values. Equity is an important asset you can use when refinancing or taking out a home equity loan.

Here’s an example using our $100,000 mortgage: Let’s say that after 15 years of making payments, your unpaid principal balance is around $71,000 and your property’s appraised value is about $150,000. That means you’d have about $79,000 in equity ($150,000 - $71,000 = $79,000).

There are basically three ways to build equity in your home: Home improvements, increases in property values, and making early principal payments. (As a bonus, don’t forget that making early principal payments can save you lots of money in interest charges.)

If you can manage it, paying extra toward your principal can save you thousands of dollars in the long run. So if your goal is to build equity or save money on interest, paying extra on your mortgage principal might be a good strategy for you.

How do I pay off my mortgage?

As you get close to the end of your loan term, you should think about paying off your loan. However, your unpaid principal balance (as listed on your mortgage statement) isn’t the total amount you need to come up with to pay off your mortgage. That’s because you also owe interest charges right up until the day you pay off your loan.

There may be other charges you haven’t yet paid, such as deferments, taxes, or homeowner’s insurance premiums. Finally, depending on your mortgage agreement, you may also have to pay a prepayment penalty to pay off your mortgage before the end of your term. So expect your payoff amount to be higher than just your principal balance.

To request a payoff quote, call us at 800-365-7107. We’ll run the numbers and send you a letter that explains the total amount you’ll need to pay off your loan. But note: Your quote will have an expiration date, so act quickly once you receive it. Otherwise, your quote may expire, and you’ll have to start over and get another one.

The bottom line

Your mortgage is an important financial tool that helps you become a homeowner without having to make a huge down payment. But when you take on a mortgage, it’s good to understand what makes up your payment—including principal, interest, taxes, insurance, and any other fees.

Knowledge is power. By understanding the various parts of your payment and how they work, you can make wise decisions about paying your mortgage. It’s the knowledge that can potentially save you many thousands of dollars—and even reduce the term of your loan.