Principal is the amount of money borrowed or the outstanding balance on a loan. A portion of the principal amount is typically paid with each mortgage payment.
Interest is the amount charged for borrowing money and is also paid directly to the mortgage lender.
Property taxes are paid to your local government based on the assessed value of your home. This may be part of your monthly payment if an escrow account is established. Otherwise, it is paid directly to the assessor's office.
Homeowners insurance protects you against damage to your home caused by fire, theft, wind and/or other covered causes or insured events. Generally, a lender requires the amount of insurance coverage to equal the value of the dwelling. If you live in an area that's prone to natural disasters, like earthquakes and floods, you'll need additional policies to cover the risk. For more information about the National Flood Insurance Program, call the Federal Insurance Administration at 1-800-427-4661 or visit FEMA's website.
As with property taxes, homeowners insurance is paid either directly to your insurance company or as part of your monthly mortgage payment through an escrow account.
Mortgage guarantee insurance covers lenders against default due to nonpayment on a mortgage loan. It is often referred to as MI or PMI and is typically required when the loan amount exceeds 80% of the appraised value of the home.
What is an escrow account?
With an escrow account you pay a portion toward your annual tax and insurance costs each month that is deposited into an account managed by your mortgage servicer. When the tax and insurance bills are due, your servicer will make the payments on your behalf.
Copyright 2013. Rick Plutchak. All rights reserved.
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