A Guide to Your Mortgage Payment

What Exactly Is a Mortgage?

When buying a home, your mortgage is the long-term legal agreement you’ve entered into with your lender. Your lender is loaning you the money to buy the home, and you’re agreeing to pay back your lender via regular payments (typically monthly).

You’re not only paying for the cost of the home (otherwise known as the principal), but you’re also paying interest to your lender for lending you the money. Your mortgage payment might also include funds held to pay property taxes, insurance and other fees.

What Makes Up My Mortgage?

The four main parts of a mortgage payment are principal, interest, taxes and insurance (PITI). Principal and interest make up most of your payment (P&I). As we explain the parts of a mortgage payment, we’ll use a $400,000 mortgage as an example.

Principal:
 
The amount you borrowed to buy your house. This part of your monthly payment goes to pay down your loan balance. In our example, the principal (before any payments are made) is $400,000.

When you start making mortgage payments, the portion of your payment that goes toward principal is quite small, but over your loan term (the length of time you’re paying off your loan), the portion increases. We’ll go into more detail about this in the “What is Amortization” section of this article.

Interest:

The percentage of the principal amount you pay to your lender. Interest is a fee your lender charges for lending you money.

When you begin making mortgage payments, the portion of each payment that goes toward interest starts high but decreases over your loan term. This is true for a fixed-rate mortgage, where the interest rate stays the same during your loan term. However, for an adjustable-rate mortgage (ARM), your lender may adjust your interest rate periodically based on current industry indexes, which will change your payment.

A higher interest rate results in a higher overall payment. In our example, if the rate on your $400,000 mortgage is 6%, your P&I payment will be $2,398. At 8%, that $400,000 mortgage results in a $2,935 P&I payment.*

Tax:

Property taxes are part of being a homeowner, though they vary depending on where you live. Your local municipality uses this money to fund public services like schools, police and the fire department. Taxes are usually a percentage of your property’s assessed value, thus if your home’s value increases, so will your tax bill.

If your mortgage has an escrow account (which most mortgages do), each month we’ll include one-twelfth of your expected annual property tax to your mortgage payment. When taxes are due, we’ll pay it from your escrow account. Your first years’ worth of property taxes may have been included in your closing costs. For more information on how your escrow account works, read the “Tell Me More About My Escrow Account” section of this article below, or go here for a more in-depth explanation.

Insurance:

Most lenders require you to carry homeowner’s insurance to cover property loss or damage from fire, theft or certain other circumstances. You may have paid the first years’ worth of insurance as part of your closing costs.

If your mortgage carries an escrow account, the cost of your insurance will also be included with your mortgage payment each month, as we do for property taxes. When your insurance bill is due, we’ll pay it from your escrow account.

Private Mortgage Insurance (PMI):

This may or may not be included in your mortgage payment – it typically depends how much you put down when you closed on your home. Most often, PMI is required if you put down less than 20% of your loan’s principal amount. PMI protects your lender if you default on your loan and they’re forced to foreclose on your home.

In some cases, you may have paid PMI as a single upfront payment at closing, or it might be included with your monthly mortgage payment. Sometimes your mortgage includes lender-paid PMI, for which you pay a slightly higher interest rate on your mortgage, rather than a fee.

If you do pay PMI, you might be able to cancel it before the end of your loan term, depending on your mortgage agreement and how much you’ve paid down on your loan. Review your mortgage agreement for details, and read this article to learn more about PMI.

How Does My Escrow Account Work?

You may or may not have an escrow account associated with your mortgage. If you paid less than 20% down on your home at closing, it’s likely you have one.

Your escrow account is where your lender holds money that can be used to pay your property taxes and your insurance bill (T&I). If you have an escrow account, you are contributing to it each month via your mortgage payment. Once property taxes and insurance payments are due, your lender will pay them for you. You cannot make withdrawals from this account – only your lender can.

Your T&I is usually a smaller portion of your total mortgage payment (the bulk of it is P&I), however, your T&I payment can change, and usually increases over time. If this occurs it will increase your overall mortgage payment. We will notify you of any changes.

If your mortgage doesn’t have an escrow account associated with it, then you’re responsible for remembering to pay property taxes and insurance bills when they come due. For more information on how an escrow account works, read this article.

What is Amortization?

“Amortization” refers to how you pay off a loan over time. Your amortization schedule (or payoff schedule) is a mathematical table you were given at closing that shows the amount of P&I that goes into each of your monthly mortgage payments.

As mentioned, when you are toward the beginning of your loan term, your mortgage payments consist of more interest than principal. But the closer you get to the end of your loan term, the more the interest portion of your payment shrinks and the principal portion of your payment grows. The exact breakdown of each payment is determined by a mathematical formula.

Using our earlier example, let’s look at payments on your $400,000 mortgage over a typical 30-year term:

Scenario: Partial Amortization Schedule

$400,000 mortgage | 30-year term (360 months) | 6% interest rate | Monthly P&I = $2,398*

As we can see, each payment is $2,398, but the portion that goes toward P&I shifts over each payment. At the beginning of your mortgage term, the rate at which you gain equity (pay down principal) is quite slow, but it speeds up over the years. This is why it can be a good idea to make extra principal payments, if your mortgage agreement allows you to do so without a prepayment penalty. If you can make extra payments on your principal, it also reduces the interest due on future payments.

When Do Payments Start After Closing?

For most mortgage loans, your first payment is due at least a full month after the last day of the month in which you closed on your home. Unlike rent, mortgage is paid in arrears, meaning they’re due on the first day of the month for the previous month.

For instance, say your loan closed on January 20, your closing costs would have included interest charges for the remaining days through the end of the month. Your first full mortgage payment, including P&I for the month of February, is due on March 1.

Payments are due on the first of every month (for most mortgages). To make sure your payment isn’t late, make sure we receive it by no later than 3 p.m. Eastern Time. To learn more about how to avoid late payments (and associated fees), read this article.

How Do I Make Payments?

Let’s explore some of your options:

Choose your pay frequency. Your lender might give you the option to pay biweekly instead of monthly. This results in 26 half payments over the course of a year – in other words, it’s as though you made 13 monthly payments in 12 months. The benefit of this is you end up paying less total interest and reduce your principal more quickly than you would paying monthly. This can quickly add up to savings in the thousands of dollars and potentially shave years off your loan.

Sign up for Autopay with Newrez. You can make the payments yourself each month, but if you want to have one less to-do item to remember, we offer borrowers the option to sign up for autodraft, otherwise known as automatic withdrawal or ACH. With autopay, we’ll automatically deduct your mortgage payment from your bank account each month on a date of your choosing.

To sign up for autodraft, sign into your account, click on your loan number to access your dashboard, select Payments and click Schedule Recurring Payments. Enter your bank account information, click save, and you’re done!

If you’d like to sign up for biweekly or semi-monthly payments, fill out this form, and then log into your account, going to your dashboard and selecting Contact Us. Go to “What is your question about?” and choose Payments for ACH, upload the form and hit Submit. To learn more about the conveniences of autodraft, read this article.

How do I pay manually? There are five ways:

• Pay on our website. You can make payments through our website so long as you have an online account. Go here to create a new account.
• Pay online through your bank. If you do your banking online, you can use their website or mobile app – just enter the amount of your monthly payment and set the payee name to Newrez Servicing.
• Pay over the phone. We have an automated phone system for payments reachable at 866-317-2347.
• Pay by check or money order. If you prefer the old school way of doing things, you can mail us a check to:

Newrez Servicing
75 Beattie Place, Suite LL202
Greenville, SC 29601

Be sure to write your loan number on your check. We do not accept cash payments.

• Pay by wire transfer. Use the information below:

Citibank N.A
388 Greenwich St.
New York, NY 10013
Routing #: 021000089
Account#: 31354717
Name: NEWREZ LLC DBA SHELLPOINT MORTGAGE SERVICING CONSOLIDATED DEPOSIT ACCOUNT

How Do I Build Equity?

Equity is the appraised value of our home minus your outstanding principal balance. The more you pay toward your principal, the more equity you gain. Equity increases as you pay down your loan, or as you add value to your home through improvements. You can make use of your equity by refinancing or taking out a home equity loan.

Equity is also impacted by whether your home appreciates in value over time, and by how much. Property appreciation is affected by surrounding properties and the general fluctuations of the housing market, among other factors.

Let’s return to our $400,000 mortgage example: After 15 years of making payments, you have $284,195.95 left in unpaid principal, and your home has appreciated in value to $500,000 (in this scenario) – thus you have $215,805 in equity.

How Do I Pay Off My Mortgage?

Owning your home outright is a great goal, and as you approach the end of your loan term, your principal will shrink down to a number that might cause you to consider paying it off all at once.

Bear in mind that you still owe interest up until the very end of your loan, and you might also owe other charges including taxes, deferments or homeowner’s insurance premiums. Also, depending on your mortgage agreement, you might face a prepayment penalty for paying off your mortgage prior to the end of your term.

To get a payoff quote, give us a call at 866-317-2347. We’ll make the calculations and mail you a letter detailing the amount you’ll need to pay off your loan. But heads up: Your quote will have an expiration date, so move fast once you receive it.

I Have More Questions About My Mortgage.

If you’re looking for more details about your mortgage that can’t be found in your mortgage agreement, log into your online account and use the live chat function on your dashboard. Our online representatives will be glad to answer your questions.

*Not an actually available rate. For illustrative purposes only.