mortgage payment plan

Wondering how many different types of mortgage payment plans there are?

A mortgage is a home loan given by a lender that allows you to purchase a house in exchange for paying them monthly interest rates. The lender also has the right to seize the property in case you fail to repay the agreed upon monthly payments. This means that the house becomes the collateral.

Mortgage itself has several different types, from VA and FHA loans to bank statement loans and reverse mortgages. In addition to that, there are different payment structures you can choose when repaying the loan amount.

Understanding Your Mortgage Payments

Mortgage payments are divided into four elements.

  1. Principal
    The principal basically refers to the amount of money that you borrow in a mortgage, and the amount that you have to pay back. For example, if your loan is $150,000, then the principal is also $150,000. Usually, the monthly payments during the first few years are dedicated more to interest, while the latter years are for the principal.
  2. Interest
    Perhaps the most important part of a mortgage, and what makes borrowing money possible in the first place, is the interest. This is the reward for lending money and taking a risk on you. The interest rate depends on factors such as down payment and also your individual credit score. A higher interest rate will mean higher monthly payments.
  3. Taxes
    The tax you have to pay is calculated from the total amount of monthly payments you make in a year. This will be collected by the lender, usually also on a monthly basis, and held in escrow until the taxes are due. The government utilize property taxes to pay for public services like school and fire departments.
  4. Insurance
    Insurance in a mortgage is paid for with each monthly payment and held in escrow. The two types of insurance include property and PMI. While the first is useful to protect against theft and fire, PMI protects lenders from default risk. It’s a must for those who make a small down payment and can be removed once you own 20% of the home equity.

Note that some mortgage programs include only principal and interest, and not taxes and insurance. This will make the monthly payments lower but impact the mortgage in other aspects.

Different Types of Mortgage Payment Plans

Monthly
The most popular type of payment structure for a home loan is monthly. This means that you pay on the same day each month (usually on the 1 st ), which would total 12 payments in one year.

Bi-weekly
Meanwhile, a bi-weekly structure requires you to make a total of 26 payments per year.

Accelerated Bi-weekly
An accelerated bi-weekly payment structure is much like the bi-weekly payment. You will be making 26 payments a year, but the amount will simply be higher.

Weekly
In a weekly payment structure, you have to make 52 payments in total. This is one for every week of the year. It’s the least common option as more people opt for the monthly payment.

Accelerated Weekly
Likewise, an accelerated weekly mortgage payment refers to a payment structure where you make 52 payments per year, but the weekly amount is higher than the regular arrangement.

Regular VS Accelerated Mortgage Payments
An accelerated mortgage payment just means that your monthly payment costs a little bit more than it should, so that you will save more in the long run in terms of interest rate. This also means that you pay one extra month per year, divided over the 12 initial payments.

When Do Mortgage Payments Start?

This is a common question among future homebuyers. Your mortgage payments will start on the first day of the month once you’ve stayed in the property for 30 days. The monthly payments are also for the previous month. For example, if you buy a home on February 25, the closing costs will include the remaining days of February.

Meanwhile, the first full mortgage payment (for the month of March) won’t be due until April 1 st .Don’t worry if this sounds too complex as your lender will be sure to detail the payments before you close the deal.

Closing

All in all, a mortgage can be a great financial tool to help you buy a home and be a homeowner. But before you apply for a home loan, it’s worth doing your homework and understanding the ways you can make your monthly mortgage payments. From monthly to weekly, from regular to accelerated, all of these can affect how much you end up paying your lender. The mortgage payments also include the principal, as well as interest, tax, and insurance premium. We hope this post provides a nice guidance and streamline your homebuying process. Good luck!