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Are Mortgage Payments Monthly Expenses?

mortgage is a long-term loan used to finance the purchase of real estate. For many homeowners, the monthly mortgage payment is one of their largest recurring expenses. But are mortgage payments actually considered a monthly expense?

Yes, mortgage payments are considered monthly expenses. However, only the interest portion of the payment is treated as an expense for accounting and budgeting purposes. The principal portion, which reduces the loan balance and increases home equity, is not classified as a monthly expense.

A chart showing monthly mortgage payments.

How Does a Mortgage Work?

When you take out a mortgage, the lender loans you a large sum of money (the loan amount) to pay for the home. This loan is secured by the property itself – the home serves as collateral on the loan. 

You agree to repay the loan over time, typically 15 or 30 years. Each month, you make a mortgage payment to the lender. A portion of your payment goes toward the interest charged on the loan. The rest goes toward paying down the principal – the amount you originally borrowed.

As you make payments over time, you build equity in the home. The equity is your ownership stake – it’s the portion of the home’s value that you actually own. 

Are Mortgage Payments Considered Monthly Expenses?

For accounting and budgeting purposes, most experts consider the interest portion of your mortgage payment to be a monthly housing expense. 

Interest is essentially “rent” you pay to borrow money for your home. Like rent, it’s money that doesn’t build equity.

On the other hand, the portion of your payment going toward principal is not considered a monthly expense. That money reduces the amount you owe and increases your ownership stake in the property.

So – the interest portion is a monthly expense, while the principal portion is not.

How to Calculate Your Monthly Mortgage Payment

Your exact mortgage payment depends on several key factors:

1. Loan Amount

The larger the loan, the higher your monthly payment. Even a small difference in loan amount can significantly impact your payment.

2. Interest Rate

The interest rate has a major influence on your payment amount. Even a small rate increase can raise your monthly payment substantially.

3. Loan Term

Longer loan terms (e.g. 30 years) result in lower monthly payments because the payments are spread out over more months. Shorter terms (e.g. 15 years) mean higher payments.

4. Property Taxes

Your monthly payment includes an escrow amount to cover annual property taxes. Higher taxes raise your payment.

5. Homeowners Insurance

Your payment includes escrow for homeowners insurance. Higher insurance costs mean larger payments.

6. Private Mortgage Insurance (PMI)

If your down payment is less than 20%, you likely have to pay PMI until you reach 20% equity. PMI increases your monthly payment.

How Can You Lower Your Monthly Mortgage Payment?

If your mortgage payment is too high, here are some strategies to reduce it:

1. Refinance Your Loan

Refinancing involves taking out a new mortgage loan to replace your existing one. Doing so allows you to potentially get a lower interest rate or longer loan term, which lowers your monthly payments.

2. Extend Your Loan Term

You may be able to modify your existing loan to have a longer repayment term, such as switching from a 15-year to 30-year mortgage, which spreads payments out over more months.

3. Make a Larger Down Payment

Putting more money down upfront lowers the loan balance so your monthly payments are smaller. 

4. Remove PMI

You can request PMI removal once you reach 20% home equity. This eliminates that portion of your payment.

5. Challenge Property Tax Assessment

If you think your property taxes are too high, you may be able to appeal to potentially lower them and reduce your monthly escrow amount.

What Happens If You Miss a Monthly Mortgage Payment?

Missing even one monthly mortgage payment can damage your credit and lead to fees and penalties. If you miss multiple payments, you risk going into mortgage default.

Default occurs when you are significantly behind on payments. Your lender will start the foreclosure process to take possession of the home.

Foreclosure devastates your credit score and makes it very difficult to qualify for future loans. You lose the equity you built up in the home. The lender can sue you for the remaining loan balance.

What Are the Consequences of Defaulting on a Mortgage?

In summary, the major consequences of mortgage default include:

  • Serious damage to your credit and ability to borrow money
  • Foreclosure and loss of your home 
  • Loss of equity in the property
  • Legal liability for the unpaid loan balance
  • High fees, legal costs, and penalties
  • Difficulty finding housing due to damaged credit

While missing the occasional payment due to hardship may be unavoidable, it’s critical to avoid defaulting on your mortgage. Work closely with your lender to remedy any payment issues before they spiral into a foreclosure.

Frequently Asked Questions(FAQ)

Why is mortgage not an expense?

A mortgage is not an expense because it is a loan taken out to purchase a property. The loan must be repaid over time, usually in monthly installments, with interest. The payments are considered an investment, as the property will increase in value over time, and the loan must be repaid in full at the end of the term.

How much house can I afford making $70000 a year?

The amount of house one can afford making $70,000 a year can vary depending on a number of factors, including the down payment amount, the loan type, and the interest rate. Generally speaking, a person making $70,000 a year can afford a home worth up to $400,000 assuming a 20% down payment and a 30-year fixed loan at 3.5% interest. Bankrate’s new house calculator can help further narrow down the amount of house one can afford depending on these variables.

What kind of expenses are most mortgage payments?

Mortgage payments are typically composed of principal, interest, taxes, and insurance. Principal is the amount borrowed to purchase the home, interest is the cost of borrowing the money, taxes are levied by the local government, and insurance covers the cost of any damage to the property. All together, these expenses make up most mortgage payments.

What does mortgage expense mean?

Mortgage Expense is a term used to describe the costs associated with obtaining a mortgage loan. These costs can include origination fees, points, appraisal fees, title insurance, and other closing costs. Mortgage Expense is typically paid upfront at closing and is in addition to the principal and interest payments made throughout the life of the loan.