If you’re buying your first home, it might seem like going from paying rent to paying a mortgage is merely switching out one monthly bill for another.
But rents and mortgages differ on a couple of levels. For one, mortgage payments contribute to your stake in the home. The more payments you make, the more of the home you legally own.
The other major difference is what a mortgage includes. While rent is simply a once-a-month fee, a mortgage payment comprises what is known as PITI.
That acronym stands for:
- Principal: This portion of your payment goes toward the total balance of your mortgage loan, without any other charges.
- Interest: This is the extra cost of financing your home. Your interest rate (which is set when you apply for the loan) determines how much interest you pay annually.
- Taxes: As a homeowner, you’ll need to pay property taxes. These are typically paid monthly as part of your mortgage, and they could be included in your escrow account.
- Insurance: Your homeowners insurance policy, which can also be paid using escrow, protects your home from weather damage, theft and other potential issues. If you require private mortgage insurance, that will add to your monthly costs as well.
If you’re considering buying your first home, it’s essential that you understand what goes into a mortgage payment — as well as how you pay off that loan year over year.
And don’t assume that all of the monthly fees add up to more than your rent, especially when you consider the equity you’ll be building.
Want to learn more about the costs you can expect when purchasing a home? Get in touch today if you have questions.