If you obtain a new loan to reduce your interest rate you will repay more than you borrowed. In addition to your interest rate, term and loan amount, how much you repay is determined by several factors. Here are the components you need to know:
Remember that interest rates only tell part of the story. The total cost of a mortgage is reflected by the interest rate, discount points, and origination charges. Use our Should I Refinance Calculator and Refinance Breakeven Calculator to determine if a refinance is a good idea for you. This total cost is known as the annual percentage rate (APR), which is typically higher than the interest rate. The APR enables you to compare mortgages of the same dollar amount by considering their total annual cost.
Your monthly mortgage payment is typically made up of four parts:
- Principal is the amount of money you borrowed.
- Interest is the cost of borrowing the money.
- Taxes are the property taxes charged by your local government. Typically we collect a portion of these taxes in every mortgage payment and hold the funds in an escrow account for tax payments made on your behalf as they become due.
- Insurance refers to homeowners or hazard insurance that provides protection against property damage due to wind, fire or other risks. Like taxes, insurance costs are typically collected and paid from an escrow account.
Depending upon your property location, property type and loan amount, you may incur other monthly or annual expenses such as mortgage insurance, flood insurance, and homeowners association fees.