Hey this is Jeremy from Shine Insurance

and today we’re going to dig into the three parts of your monthly mortgage

payment. That’s right, when you make your monthly

port mortgage payment it is actually paying for three different

things with your mortgage company. I’m going to dig into what those

three things are right now. So the first thing is what you would think that

you’re paying for and that’s called principal. The next thing is interest. Finally, one of the more confusing part is the

escrow account contribution. I’m going to shed light on all three of

those things right now. So let’s start with principal. Principal is a part of

your monthly payment that goes towards paying down your debt. So you borrowed

money from the bank and of course you have to pay that money back. That makes

total sense. So each month one part of what

you’re paying back to the bank is actually paying down the debt that you

owe. So that makes sense right? Let’s dig into interest. Interest is the

part of your monthly payment that goes towards paying the mortgage company for

the privilege of borrowing their money. Now, we wouldn’t expect a business to

loan us a bunch of money (often hundreds of thousands of

dollars) and not want something in return. Of course they do want something in

return. Interest is what they get in return. So it’s extra money that you’re paying on top of

what you borrowed back to the people that you borrowed it from. An important side note here. There are

two main different kinds of mortgages that

you can purchase. There’s the fixed rate mortgage and there’s adjustable

rate mortgages. The best mortgages are the fixed rate mortgage which means

the interest rate won’t change over the course of the loan. So you know what

you’re getting, you know what is going to cost for the total course of the loan. If it’s a 30 year loan and you have a four percent interest rate then you know

with a fixed rate mortgage, that can’t change. So that’s the best kind of mortgage. The

other kind is called adjustable rate. Unless you’re a financial guru really try to avoid

these adjustable rate mortgages. This is because they can change in ways

that you just don’t understand. So five years down the

road you could be paying a totally different monthly amount for your mortgage and

you could be paying a lot more interest to the the mortgage company

than you thought you would be because the interest rate was adjustable. So if

you’re a financial guru and you look at a loan you want to get, it has an

adjustable rate and you really understand exactly how the whole thing

is set up… great but for the rest of us, we want to stick with

fixed rate mortgages because they’re just easier to understand and they’re

more stable. The third part is the

escrow account contribution. This is simply the part of your monthly payment

that goes towards paying your property taxes and your homeowners insurance. So

these are actually bills that are paid by your mortgage company out of an escrow

account that you’re contributing towards every month. You’re paying a little bit

in each month and then the bills for property taxes or

the bills for homeowners insurance go to your mortgage company and the mortgage

company pays that. But of course they’re not going to pay out of their own pocket.

That wouldn’t make sense. They’re paying it out of your escrow

account which is a little tiny bank account that’s connected with your mortgage. If you have

a fixed rate mortgage than insurance and taxes are really the only reasons that

your monthly mortgage payment amount should ever change. So another really good

reason to have a fixed rate mortgage is if something changes about your monthly

payment, you get a bill in the mail from your mortgage company and it says well

you were paying 900 bucks last month now we need you to pay a thousand dollars,

you say wait a minute why?? If you have a fixed rate you know you can zoom right

in on insurance or taxes to figure it out Ok let’s put this into a visual picture

that we can follow through the rest of this video. So let’s use the example of a

nine hundred dollar monthly payment. In this example we could say that

principal, interest, and escrow are broken up into $300 a month

for principal, $400 a month for interest, and $200 a month for escrow. That would be perfectly reasonable and will

dig into why in a second but I want to zoom in first.

I want to push the escrow thing over to the side for a minute and just

kind of put that on hold. Let’s look at interest and principal. So

let’s look at what you’re paying back the money borrowed (Princple)and you’re paying

back as well as the extra money you’re paying to the mortgage company for the

right the privilege of borrowing money from them (Interest). At the very beginning your

monthly payment is going to have a lot of interest in it and the

principal your payingmight be a very small amount to start. So you’re really not paying

back a bunch of money that you borrowed. You’re paying a ton of interest. A lot

of people say the mortgage company is setting you up or trying to

make things harder for you. There’s lots of different opinions on

why it’s set up this way but let me just show you exactly

what’s happening here and why you’re paying more interest than principal at

the beginning of your loan. So let’s use the example of a $150,000 loan with a 4% fixed interest rate. We’re

gonna make all these numbers really really even. So I have it broken

down here into year 1, year 10, year 20, year 30. This shows what you owe at those

given periods of times and what four percent interest would be on that

for a whole year. So let’s just look at year 1. On year 1 we we have $150,000 of course because we just borrowed that money. 4%

of $150,000 is $6000. So over the

course of this first year you’re going to need to pay back $6000

in interest. So what we do is we break down the monthly payment and we

say okay, the monthly payment is $900 and that’s what set at the beginning of the loan. I kind of want you again to

push the escrow part out of this picture. I didn’t want to remove it from the

picture because it is the third part of your payment but for right now we’re

focusing on principle and interest. As you can see principal and interest

will add up to$700. here. In fact, all the way through my example

they’re going to add up to $700 So in this first year, let me go back and

remind us, we’re paying $6000 in interest. If we

divide that by 12 we know that we’re going to be paying

$500 a month. So we’re paying

$700 a month no matter what every month for principal and

interest through the course of the loan. If interest is going to cost us $500 there’s only $200 left pay

towards principle. So at the beginning of our loan we have

a lot of interest to pay because we still owe a lot of money, There’s

not a lot left for the principal to be paid if we’re going to stick with that

$700 for principal and interest. So $500 for interest

leaves us $200 for principal. Now we jumped to year 10

and we’ve paid down about $30,000 So what we owe in year 10 is $120,000. Now we do some basic math here. 4% of $120,000 is going to be $4800. So on year

10 we’re going to have to pay $4800 in interest. If we divide that into 12 equal months were going to be paying$400 per month

right? So we have to pay $400

per month in interest and we know that between interest in principle we

can only pay $700 because that’s not going to change. So $300 is what we’re

paying for principal. Interest is figured first. Principle is what’s left over. So we had $400 dollars in interest now we’re paying

$300 in principle. Ok so on year 20 you owe $80,000. 4% of that is $3200 $3200 means that

for this given time we are paying about $300 in interest. Now it’s really gonna be $3600 that we’re paying so I’m off a little bit here on the number but

just to keep it even let’s stick with this idea that we’re

paying about $300 in interest. We know that the two broken up between

principal and interest need to be $700 We’re paying $300 in interest. That

leaves about $400 for principal. So that’s what will be

paid in principle. Notice now we’re paying a lot more in principle. We’ve

broken over that X and now we’re paying more in principle less in interest. This also means we’re starting to pay down our loan more quickly. Finally year 30 we’ve got $12,000 left.

That means 4% of that is gonna be $480. We break

that by the month that’s just going to be $40 bucks per month in interest. Obviously now the lion’s share of that

$700 is going towards the principal. We’re paying down the principal

much faster and that is because we’re not paying as much interest. So over the

course of a loan we start with more interest because we

owe more money and we’re not going to change the amount of money we’re paying

for a monthly payment. That doesn’t leave very much space for paying

principle. But as we move along in the loan there’s less and less interest that

needs to be paid in that $700. This leaves more space for the

principal and therefore we start paying principal more which means we start

paying the loan off more quickly. So principal is the amount of money we’re

paying off that we borrowed. Interest is the amount of money that the bank is

charging us for the privilege of borrowing money from them. Those two

things kind of cross over the course of the loan paying more principle and less

interest as we go. But there’s a rookie mistake that lots of people make and I made it on my first loan. I had no idea what my escrow account

contribution was and so a year or two into my loan my monthly payment went way

up. I thought the mortgage person had duked me you know had

set me up or something like that. I was just wrong though because i didn’t

understand my escrow accounts impact on my monthly payments. So you’re going to understand better than I did in the next

two minutes. You’re going to understand exactly how your escrow account works.

So your escrow account, as we’ve said before, is for the sole purpose of

accumulating money in a little tiny bank account that is going to

pay for your property taxes and is going to pay for your homeowners insurance. The reason the mortgage company wants

control over this money is they want to know that these bills are being paid. if you don’t

pay your property taxes the county or the city can come in and put a lien on your house or

all kinds of nasty stuff. If you don’t pay your homeowners

insurance and your house burns down then you still owe a bunch of money

and your insurance company can’t pay to rebuild your house and so there

isn’t any asset there for the to get that money back. So they want to know that

those two things are being taken care of. By including an escrow account in

your mortgage loan they know it’s being taken care of because they’re the

ones making the payments. ok so how does an escrow account work.

Well let’s just look at it month by month. Month one in this

example we’re putting $200 into our escrow account and so

we’ve accumulated $200 total in our escrow account. Month Two we put 200 more – 400 altogether. MonthThree

$200 in $600 total. Month Four we add another $200. Now we’re all the way up to

a big old $800. Month 5 $200 in – $1000 total. Month 6 $200 in –

$1200 total. Then a homeowner’s payment comes in. A bill for homeowners insurance

and they want $100 for the homeowners insurance. Now that bill

remember doesn’t go to you, it goes to your mortgage company and your mortgage

company is going to pay that out of what you’ve accumulated in your escrow

account. So your mortgage company’s going to pay that $1000. That means that what’s going to be left in

your escrow account is $200. So it just continues on like

that. So Month 7 you pay $200 in that accumulates to four

hundred dollars and so on and so forth. You’re paying a certain amount of money

into your escrow account every month that escrow account is accumulating and

then when the bill comes in the escrow account is going to pay that bill and

it’s going to be taking care of. Everything is hunky-dory. Now here’s where you can get in trouble.

What if your insurance becomes $1700? What if your

mortgage company gets a $1700 bill for homeowners insurance

because insurance premiums can change, right and they certainly do change. In that case your mortgage company figured that it was going to be $1000

for insurance but then it became $1700 the next year. What’s going to happen to your escrow

account? Well that escrow account is going to get overdrawn because that

$1700 got paid out and now you’re negative 500. So look

at what the mortgage company does. In those cases they say, “oops, we’re not

collecting enough money the bill is higher than what we thought it was going

to be so we’re not collecting enough money.” What are they going to do? It

may not happen right the next month but they’re going to charge more money for

your escrow portion of of your mortgage payment. So here we’ve got it up to $300

and now start to accumulate your escrow account back up. So what does that do to your

monthly payment now that they raised the escrow contribution $300?

What’s going to happen your monthly mortgage payment?

Well of course the principally interest can’t change and so we see in this

example we still have $700 that we’re paying to principal and

interest. So those aren’t going to change at all. But escrow now went up from $200 to

$300 What’s going to happen is that your total monthly payment is going to

go up from $900 to $1000. So your escrow contribution went up by

$100 and therefore you’re total monthly payment went up by

$100. They are directly related to each other. That’s where people get

confused a lot. So that was it. OK let’s review the three different parts of your

monthly mortgage payment. We start with principal. Principal is

the part of your monthly mortgage payment that you think you would be

paying which is going towards the debt that you borrowed. Paying down the money

you borrowed. Y,ou borrowed money you’re paying it back. Interest is the amount of money that we

pay to the mortgage company for the privilege of borrowing their

money. They’re not gonna loan us money for free. Interest is how they make money

off of loaning us money. Fiinally your escrow account. This is the part of your

monthly payment that goes towards paying your property taxes and homeowners

insurance. It can grow (from your taxes or insurance going up).

When the escrow portion goes up that’s going to cause your monthly

payment to increase. All right, you got it! That wasn’t

so hard, right? Three parts of your monthly mortgage payment>now you know. If you want some other Shine videos

we’ve got some great ones for you. Starting off with a New Home Buyers

Guide. This really walks you through from beginning to end from thingking “hey maybe I want to buy a house” and all the way through

to the very end. There’s a little part of it that’s very much about the same thing

as this video here, what your monthly mortgage payment is.

But also talks about all the things that happen in the escrow period (which is completely

different than an escrow account interestingly) and loans and all those

kinds of things. A new home buyers guide laid out really nicely for you. Real

simple. We’ve got five steps to a homeowners

claim, something you should know whether you’re involved in a claim or not. So you just understand how

homeowners insurance claims work and then finally, if you just want to laugh, how not to light a bonfire. This is part

of our #noinsurance4u series and it’s a video of someone making some

pretty poor decisions that combine gasoline and a bonfire. You can check

that out over on our youtube channel. ok what’s next? – as always the last step

in this video is really really simple. If you haven’t done so already please

head over to our Channel and subscribe you can click on this button right here. Subscribe to our channel. We really

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and share it with some other folks. Awesome, i hope you enjoyed this video. I

know I enjoyed creating it for you and I’m glad that you understand your

mortgage payment in a way that you didn’t before. So until the next time have a wonderful

day!

They don't just take the interest for the year. It's your principal times your interest divided by 12 and that's your interest for the month. Still good video

What happens to the escrow account at the end of the loans term and the mortgage is payed off?

PrincipAL, not principle.

Good video. Very helpful.

It's great video

But the problem is if escrow account increases every 6 months by 100$ by year 10 you'll be paying 2700$ per month instead of 900$

Good video but from your example for $150,000 house at 4% interest where did you get the $900 from? How do you know the total monthly starts at $900? Can you increase the principal from the start and go over the $900 monthly payment if you wish to do so?

Why not pay the homeowners insurance upfront for a year?

I'm experiencing a major increase in my escrow currently. It increased my total mortgage payment by 50%. I bought 2 years ago and yes the area I am in is up and coming, so the city taxes have gone up, but shouldn't they have adjust this within the first year? The city said some of what i am paying now in this increase is to pay back what I should have been paying last year. Is this normal? Do I have any right to argue this? Please help!

Great video! Quick question! I just received an email with the property tax for the year. Do I need to pay that or my scrow payments should take care of that? This video got me thinking. Thank you for any reply!

If I take a 30 year loan and pay off the principal in 20 years, will I save money on interest payments? Will the total amount I pay over the lifetime of loan be any less?

I'm paying an extra $100 towards principal each month. I hope that helps me pay it off faster. I couldn't stand watching my loan trickled down each month and not really get any smaller