Understanding Your Monthly Mortgage Payment: A Guide for First Time Homebuyers in Dallas, TX

As a first-time homebuyer, navigating the jargon around mortgages can be overwhelming. One crucial aspect to understand, and one aspect you’re probably most curious about is your monthly mortgage payment. We’ll break down the components of a typical monthly mortgage payment and help you gain a clear understanding of what it’s comprised of and how it impacts your buying power.

Escrow Account

Before jumping into the payment breakdown, let’s cover what an Escrow Account is. To simplify the payment process and ensure that taxes and insurance premiums are paid on time, many lenders set up an escrow account. A portion of your monthly mortgage payment is allocated to this account, and the lender uses the funds to pay your insurance and property taxes when they become due.

If your down payment is under 20%, you will be required to carry an escrow account. When we talk about a mortgage payment, we’re usually referring to the PITI: the Principal, Interest, Taxes & Insurance.

Principal and Interest:

The largest portions of your monthly mortgage payment are typically dedicated to the principal and interest. The principal refers to the initial amount you borrowed from your lender to purchase the home. The interest is the cost you pay for borrowing that money. Together, the principal and interest make up the true loan payment based on the loan amount, interest rate and loan term.

Homeowners Insurance:

Sometimes seen written as “hazard insurance”, this protects your property and belongings against damages caused by perils such as fire, theft, or severe weather events. The cost of homeowners insurance varies depending on the value and location of your home, as well as the coverage limits you choose.

Taxes:

Property taxes are another significant component of your monthly mortgage payment. These taxes are calculated by the county appraisal district based on the value of your property. In Dallas, TX, property taxes support various local services, such as schools, infrastructure, and public safety. The exact amount you pay in property taxes is determined by the existing appraised value of your home and the local taxing entities.

Private Mortgage Insurance (PMI):

If your down payment is less than 20% of the home’s purchase price, your lender may require you to pay PMI. PMI protects the lender in case you default on the loan. The cost of PMI is calculated as a percentage of your loan amount based on your loan terms and qualifying information. Once your equity hits 20% of your appraised value, you may be able (under certain conditions) to remove PMI from your payment.

By breaking down the payment into its key elements, including principal and interest, insurance, taxes, and mortgage insurance, you can better estimate your anticipated monthly payment and better budget for your purchase.

Remember, the specific amounts for each component will vary depending on factors such as your loan amount, interest rate, home value, and insurance coverage. After we have your pre-approval in place, we’re able to provide accurate estimates tailored to your unique situation and goals.