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What Is Included in My Monthly Mortgage Payment?

By Eric Goodwill

Find out how lenders calculate a monthly mortgage payment and why charges vary. The best lenders provide full disclosure before requesting fees.

Lenders calculate a borrower’s monthly mortgage payment using five different amounts. Industry standards require full disclosure of total costs before funding a loan. All lenders use a similar calculation but the amount of included costs may vary. Variations typically occur because of the cost of insurance premiums.

The Monthly Mortgage Payment Calculation

Principal and interest charges comprise the bulk of a monthly mortgage payment. The original amount funded determines total principal. Occasionally, the principal balance may increase unexpectedly. For example, lenders add late fees to the total amount owed and borrowers may notice a slight increase in the principal balance appearing in a statement. Loan approval documents contain the interest rate charged on the outstanding balance. After funding, the total outstanding balance owed begins accruing interest charges daily.

In addition, lenders estimate an amount necessary to pay all annual property taxes and divide by the cost by 12. Many loan agreements also require homeowners to carry hazard insurance and mortgage insurance. The total amount of a monthly mortgage payment includes the cost of these three items. Borrowers who pay more than 20% down on a home loan may be exempt from the mortgage insurance premium requirement.

Why Costs Vary

Insurance premiums vary according charges assessed by an underwriter. Borrowers may notice large differences in premium charges for identical coverage that is available elsewhere. In this circumstance, consider requesting a coverage change. As the size of a loan increases, savings may be substantial over the life of a loan. Occasionally, a few less reputable lenders may refuse to change insurance coverage because of an ownership interest in underwriting company.

Tax estimates are seldom 100% correct. Expect slight adjustments from time to time when government units increase taxes. When estimates are high, borrowers accumulate an excess escrow balance.

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1. If I Pay More Than My Monthly Payment On My Mortgage, How Is It Applied?
2. How Do I Calculate a Monthly Mortgage Payment?
3. How How Much Insurance Do I Need After Being Approved For My Home Mortgage?
4. What Information Will A Mortgage Payment Calculator Provide?
5. How Will My Mortgage Interest Rate Impact My Monthly Payment?