Mortgage payments might seem very straightforward: you take out a mortgage and, each month, you pay back a fixed amount, with the payment comprised of a mix of interest payments and repayment of the principal. But it’s not that easy.
Mortgage payments also factor in property taxes and home insurance. In most cases, for simplicity’s sake the mortgage lender actually pays your property taxes and the cost of your home owner’s insurance; you then have to reimburse the mortgage lender as part of your monthly payment. And then there are special payment circumstances as well.
The following are two of the more common ones:
Bi-weekly payments. Some home buyers might opt for bi-weekly payments, which are due every two weeks in an amount equal to one-half the scheduled monthly mortgage payment. The purpose of establishing biweekly payments is to pay the mortgage off sooner and to reduce the total amount of interest paid.
A balloon payment. Some mortgages include balloon payments, which are so named because after a specified period, the payment required by the borrower balloons up quite notably. Loans with balloon payments generally work like a fixed long-term mortgage, at a given interest rate. However, after a five-year period, for example, the unpaid balance must be either paid off in its entirety (quite a bit of payment ballooning) or refinanced at the then current interest rates. A balloon rate payment typically has a lower interest rate than a traditional mortgage payment because the borrower is assuming more risk.