When you borrow money to buy a home, you will have a monthly mortgage payment to make. But it may come as a surprise that your payment can actually be made up of four separate costs.
It’s important to understand each of the individual components of your mortgage payment. That way, you’ll be more informed about the total amount of money you’re spending on housing. And you’ll be better equipped to make decisions that help you cut the cost of homeownership and stay within your budget.
Here are the four costs that can make up your monthly mortgage payment.
1. Principal
Principal is the amount of money you borrow from a mortgage lender when you take out a loan. So if you get a $280,000 mortgage, your principal balance is $280,000. The payment you make toward the principal goes toward reducing your loan balance. For example, say you borrowed $200,000, and $1,000 of your monthly payment goes to principal. In that case, you would reduce the amount due on your principal and would owe $199,000 after making your payment.
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Typically, when you start paying your loan, very little of the monthly payment goes to the principal. That’s because the bulk of your early payments goes to interest, and most of the principal is paid off during the later years of your…
