You’ve got the mortgage. You’ve got the house. And sooner than you’d probably like, you’ll have the monthly payment, too.
As daunting as that first bill can seem, it doesn’t have to give you jitters as long as you know what to expect. Here are some steps to understanding and making your mortgage payment, so you’re not caught by surprise.
Step 1: Understand PITI
PITI. Familiarize yourself with this acronym because it describes the parts of your mortgage payment. It stands for principal, interest, taxes and insurance — the four components of what you’ll pay each month. We’ll break it down even further.
Principal: This is the original amount of money you borrowed from the lender spread over the life of the loan. When you first start paying your mortgage, a big chunk of your money goes to paying interest. As time goes on and you make more payments, more of your money will be devoted to paying down the principal balance.
Interest: This is what lenders charge you for borrowing money so they can make money. Your interest rate, depending on how high or low it is, determines how expensive your mortgage payment will be.
Taxes: Homeowners have to pay property taxes that fund public roads, school districts and other local government functions, like police and fire protection. The tax portion of your payment will be held in an escrow account until property taxes are due each year.
Insurance: Borrowers unable to put down at least 20 percent on their home must pay private mortgage insurance, or PMI. Like interest, PMI guarantees that a lender will get paid if you default on your loan. (Side note: Don’t default on your loan.) This part of your payment also includes homeowners insurance, which covers your home if there’s a fire, theft or some other disaster. Like taxes, this will be held in your escrow account until the premiums are due.
Step 2: Budget carefully
Now that you know what’s baked into your monthly mortgage payment, you need to make sure you actually have enough money to pay it.
If you have a fixed-rate mortgage, you’re in luck. Your payment and interest rate will never change over the life of the loan. That will make it easier to set aside funds for your mortgage bill every month.
If you have an adjustable-rate mortgage, you’ll need to watch your monthly budget more carefully once the low-rate period ends and your payment potentially starts fluctuating month to month.
Step 3: Pick your payment method
Maybe you don’t want to mail a check to a mortgage servicer every month. Good thing it’s the 21st century and you don’t have to.
Most servicers and banks offer online payment options that make paying simple and convenient. (Servicers, by the way, are companies that send you your mortgage payment each month and manage your loan day-to-day. They’re the ones you pay.)
You can also set up an automated withdrawal from your bank account so you never have to really think about paying; it just comes out when it’s supposed to. You do, however, need to make sure enough money is in your account since the withdrawal date won’t vary month to month.
Prefer talking to another human? Call your loan servicer and talk with a customer service representative who can process your payment immediately. Or, if you prefer postage, you can still mail a check — just make sure you send it early enough so it gets to your servicer in time.
The bottom line: choose the method that works best for you and ensure your payments are made on time.
Step 4: Keep your records
Every financial transaction has a paper trail. Keep track of your receipts and payment confirmation documents each month you pay your mortgage. No matter what payment method you choose, things can go wrong and computers can lie. You should keep proof that you made a payment just in case something in the servicer’s system says you didn’t.