Paying Your Mortgage

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 Most mortgages have a due date on the first day of the month, with the first payment being due on the second month after the closing. For instance, if you closed on February 13, your initial payment would be due on April 1st. While many lenders provide a grace period until the 15th before imposing a late fee, it's important to note that if your payment is over 30 days late, it will be reported as a delinquency on your credit report, negatively impacting your credit score.

Consider Setting Up a Separate Checking Account 

To ensure that you always have the necessary funds to make your monthly mortgage payments, it's advisable to create a separate checking account dedicated solely to this expense. Similar to saving money, utilizing direct deposit, if available, is a prudent choice. If you receive payment semi-monthly or biweekly, allocate half of your mortgage payment to this checking account with each paycheck.

If you are paid on a biweekly basis, you will receive three paychecks in certain months, resulting in additional funds in the account. You can consider utilizing this surplus to make extra payments towards your mortgage (for more details, refer to our video on potential savings). Conversely, if you are paid monthly, deposit the full mortgage amount into the account with each paycheck. In case direct deposit is not available, promptly transfer the funds to your mortgage checking account as soon as your paycheck is deposited and the funds become accessible.

Breakdown of Payment Components 

A mortgage payment typically encompasses various elements. The primary component is the loan itself, which is divided into the principal (the initially borrowed amount) and the interest (the fee charged by the lender for lending you the money).

During the early years of your mortgage, the majority of your payment goes towards interest, with only a small portion reducing your loan balance. As the years progress, the allocation shifts, and most of your payment starts reducing the loan amount, while a smaller fraction is attributed to interest. This process is known as "amortization." If desired, you can request an amortization table from your lender, which displays the breakdown of each payment, indicating the portion dedicated to interest and principal.

Additionally, a portion of your mortgage payment may include funds collected by your lender on your behalf for property taxes, homeowners insurance, and/or mortgage insurance. These funds are held in an escrow account, from which your lender disburses the necessary payments when they are due. Collectively, the principal, interest, tax, and insurance payments are referred to as "PITI." You can click on each bubble for further information on escrow accounts.

• Escrow 

It's important to note that even if you have a fixed-rate mortgage with a consistent loan payment, the escrow portion of your mortgage can fluctuate. For instance, if your property taxes increase from $2,000 annually to $4,000, your payment will rise by $167 per month. In the event that there is insufficient funds in your escrow account to cover an upcoming bill, your lender will probably request a lump sum payment from you. Failure to make this payment promptly may result in your lender paying the bill on your behalf and subsequently expecting reimbursement from you. 

• Escrow Account Disclosure Statement 

According to regulations, your lender is obligated to provide you with an Annual Escrow Account Disclosure Statement every twelve months. This statement outlines the activity in your escrow account for the past year, including the amount you contributed to the account and the bills that your lender paid using the funds from the account. It also includes projections for the upcoming year. It is crucial to carefully review this statement and ensure that your lender is making accurate payments to the appropriate parties. Additionally, if you receive any notification about a change in an escrowed bill, it is advisable to inform your lender promptly. Typically, the property tax authority or insurance company will directly notify your lender, but it is always a good idea to reach out to them yourself as a precautionary measure. 

In the majority of cases, lenders mandate the inclusion of property taxes and insurance in an escrow account, especially if your down payment was less than 20%. It's important to note that certain mortgages backed by government programs do not offer the option of paying taxes and insurance independently.

However, if you do have the choice to handle these expenses on your own, it is crucial to consider your decision carefully. Typically, these expenses are paid only once or twice a year. Individuals who opt to handle the payments themselves sometimes face challenges in setting aside the necessary funds and may struggle to make timely payments when the bills are due.