One of the best long-term decisions that a person can make is purchasing a new home. While the value of a home may go up and down over a short period of time, home values have always increased over the long-term and have proven to be a great way to build personal equity. To purchase a home, most people will have to take out a mortgage to finance the majority of the purchase price. When getting a new mortgage, many people can be confused as to what their mortgage payment is and what it covers.

If you are wondering what your mortgage payment is, the first thing to understand is what impacts your mortgage payment.

The three factors that impact your mortgage payment is the amount of money that you are going to borrow, the interest rate that you are charged, and the amortization rate that you receive. The amount of money that you will borrow depends on the purchase price and the down payment you put forth. The interest rate that you receive is typically assigned by the bank or mortgage lender. Most borrowers choose a 30 year amortization, but there are plenty of other options to pay your mortgage off sooner than that. The longer your amortization is, the lower your payments will be, but the longer it will take to pay off the loan.

For those that are asking what a mortgage payment is, here’s what the typical mortgage payment covers:

First, it will cover your principle and interest payments. Interest is the amount of money that goes to the bank each month for providing you the loan. The principle payment is that amount of money that goes to the bank to pay down the loan balance. Each month, a little bit more money goes towards principle and a little less goes towards interest. Reduction of principle is what allows you to build equity over time.

Depending on your loan agreement, your monthly mortgage payment may also cover your tax and insurance payments. Many lenders require you to pay into real estate tax and insurance escrows every month. Then, when your tax or insurance payments are due, they mortgage lender will send the money due to the taxing authority and insurance companies. This will ensure that you don’t miss a payment and stay covered.

Feel free to reach out if you have any specific questions about what a mortgage is and what’s covered by your monthly mortgage payment.