The four things that make up your mortgage payment

3353455 - house sitting on a puzzle, the mysteries of the housing marketThere’s more to your monthly mortgage payment than the amount you borrowed from the bank. When you’re calculating how much house you can afford, be sure to consider all the pieces that typically make up your monthly payment.

Start with the principal

Each mortgage payment includes money dedicated to repay the amount you originally borrowed, the principal. For example, if you take out a $200,000 loan, that’s the principal. Loans are structured so that at the start of your mortgage’s term, your payments go largely to the loan’s interest. As the term of the loan progresses, you’ll pay off more principal.

Add interest

The lender takes a risk by lending you money, so he or she charges you a percentage of the loan’s principal to offset that risk. That rate varies depending on the state of the economy but also depending on how risky it is to lend you that money — a low credit score means more risk and a higher interest rate. And simple math says that a higher interest rate on your loan means higher monthly payments for you.

Don’t forget the government

Property taxes can be a significant amount of your monthly payment, depending on where you’re buying property. These taxes fund schools, city and county services and other local entities, and are based on the tax rate for each of those taxing authorities applied to the appraised value of your property. Typically, you can either pay the taxes yourself in a lump sum every year or divide the bill over your 12 monthly payments.

You may need two kinds of insurance

Like the property taxes that you might pay in small amounts, insurance payments can be made with each mortgage payment. The first type of insurance is property insurance, which protects the home and its contents, and is usually required for any mortgage loan. The second type is private mortgage insurance (PMI). If you pay less than 20 percent of the property’s price as a down payment, you may be required to have PMI, which protects the lender in case you default on the loan.