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Monthly Payments?

Monthly Payments?

VA homebuyers often ask, “what’s included with my monthly mortgage payment?”. Excellent question and something that’s important understand.

Your payment is broken up into four elements. We refer to these four elements as P.I.T.I. Aka – Principal, Interest, Taxes, and Insurance.

These four elements are typically broken up into two categories.

  • 1st you have principal and interest which is required on every loan.

  • 2nd you have what is commonly referred to as “escrows.” Escrows include taxes and insurance.

Principal: this is the amount of your payment that goes towards paying your loan off. Every month when you make a house payment, a portion of that is applied to your overall loan balance.

Interest: banks have to make money and therefore collect interest as part of your payment. Similar to an automobile loan, credit card, and even student loans.

Taxes: Typically the County you live in will collect property taxes based on your properties value. Instead of you paying this bill yourself every year, most mortgage companies add it as part of your monthly payment. This can be very convenient and costs no extra for the service.

Insurance: Another requirement of most loans is homeowner’s insurance. Similar to the taxes, the lender will collect the payment as part of your total monthly mortgage costs and then pay the bill for you when it’s due (usually they pay one time per year).

Note: “escrows” are not a required as part of your payment on VA loans. However, most lenders require it to be included with your monthly house payment.

Understanding P.I.T.I. can sometimes be confusing. Some people like to think of their house payment kind of like their car payment. On the vehicle, you are required to pay principal and interest every month to the bank. You typically pay your taxes when you first buy the car and renew every year when you get your license plates. Your automobile insurance is paid separately to your insurance company. Your house payment is very similar to this except all of these separate bills are included in one monthly payment instead of several separate payments.

Bonus Question

If VA does not require escrows as part of your monthly payment, why do lenders require it?

Great question, Most lenders require this is a safety measure. Think of yourself as the bank. If you loan somebody $300,000, you would expect an insurance policy on that loan, in case something unfortunate happened. If they didn’t have insurance and the house burned down, you would have a $300,000 pile of dirt and ashes if they didn’t make their house payment. The same principle holds with property taxes. The government can leapfrog all the other liens on the house if you don’t pay your property taxes. Keep in mind, lenders do not make any money off your escrow account, and they don’t charge you to handle the bills. It makes for a very convenient payment each month.

If you have any other questions regarding your monthly mortgage payment, please contact us. We are here to help.

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