Managing your monthly mortgage payments

Buying a home is one of the biggest financial commitments you'll make. It can help you invest in your financial future, provide you with stable housing and give you a place to call home for decades to come.

To protect this important investment, you'll need to manage your mortgage and the monthly payments that go along with it. Make sure you know what's included in your mortgage payment, how to make your payments and how to keep your mortgage in check.

What's included in your mortgage payment

What's included in your mortgage payment depends on the type of loan you have and your lender. How much money you put down when you purchased the property also influences your mortgage payment. You can use a mortgage calculator to estimate your monthly mortgage payments before you buy a home. Use this tool to see how changing your down payment impacts the terms of the loan. This can help you decide if you’re ready to start shopping for a loan or if you need to continue saving.

Most mortgage payments have a combination of the following:

• Principal: The original principal of your mortgage loan is the amount that you borrowed to buy or refinance the property. When you purchase your home t's the cost of your home minus your down payment.
• Interest: The interest is how much the lender is charging you for the loan, calculated as an annual percentage rate on the principal balance.
• Taxes: Some lenders collect property taxes as a part of the monthly payment, which they hold onto until it's time to pay the bill on your behalf.
• Insurance: Lenders may also include homeowners insurance and, if applicable Flood and Private Mortgage Insurance (PMI) in your monthly payments. Homeowners insurance protects you from fire, theft and damage. You may pay PMI if you put less than 20% down on your home. It's insurance that minimizes the lender's risk in case you’re unable to make payments.

Your monthly mortgage statement will show a payment breakdown for each category. Be aware that depending on the loan type, some lenders don't require you to pay your taxes and insurance as a part of your mortgage. If your lender doesn’t, you'll be responsible for paying them on time yourself. Your mortgage statement will also show you how much of your payment is going towards the principal balance versus interest. Paying down the principal faster can help you pay off your home sooner and reduce your total cost over time.

How to make your monthly mortgage payment

When your lender approves your mortgage, you’ll get information about how to make your monthly payments. If you aren't sure about any of this information, contact your lender right away so you don't miss a payment.

Depending on your lender, you may have a few different options for making your monthly mortgage payment:

• Automatic payments. For most people, this is the most convenient way to make your mortgage payment. Your loan servicer can provide information on how to sign up for automatic payments. This can help you ensure that your payments arrive on time every month without having to think about them. You'll avoid late fees and stay current on your monthly payments.
• Online payments. Another convenient option that many lenders offer is one-time online payments. Unlike automatic payments, you’ll need to sign in and make your payment each month.
• Pay by phone. You may be able to contact your lender by phone to make a payment. Some lenders may charge a fee for this.
• Pay by mail. Your lender may send you a monthly statement, an e-mail or text reminder or a coupon booklet with your mortgage information. Simply tear out the coupon or payment slip for that month's payment and include it in an envelope with a check for your mortgage payment. Since mail delivery can take time, be sure to mail your payment in advance so you avoid late fees.

5 tips on how to manage mortgage payments

1. Pay your mortgage on time

This is the best way to manage your mortgage. As long as you continue making your monthly mortgage payments on time, you'll be in good standing with your lender. This prevents you from accruing fees or risking foreclosure.

The best way to ensure you’re making your payments on time is to set up an automatic payment with your loan servicer. They'll automatically withdraw the funds from your account each month and send the payment to your lender. You can contact your loan servicer to help you set this up, or you can do it yourself through using the servicer’s online banking service.

2. Build an emergency fund

There are always unexpected expenses when you own a home, even if it's brand new. Landscaping, decorating, replacing a furnace or putting on a new roof all cost money. If you have an emergency fund in place, it can help you cover the cost of those unexpected expenses. Plus, you'll be able to do it without risking your ability to make your monthly mortgage payment. Try to set a little money aside each month until you have an emergency fund that could cover three to six months' worth of expenses

3. Only spend what's necessary on your home.

There’s a big temptation to spend money when you buy a new home. Resist it if you can. Don't run up debt buying all new furniture or drain your savings account for a cosmetic remodel. You can save up for these things over time. Doing them all at once when you first buy your home can leave you strapped for cash if other expenses come up. Make sure you’re ready to absorb likely increases to your tax and insurance costs.

4. Carefully review your mortgage statements

Make sure you review your mortgage statements when they arrive, even if you’re on automatic payments to know you’re up-to-date. Taking a quick glance at your statements can help you spot any errors. Make sure payments are being applied correctly and that you haven't been accidentally hit with a late fee. You'll also be able to keep an eye on your insurance and taxes if they’re included in your mortgage payment.

5. Pay extra on your mortgage when you can

If you can, consider paying a little extra toward your principal each month. Paying even a small amount over your regular amount can shorten the length of your loan, saving you interest over time. You may also benefit from making bi-weekly payments versus monthly payments since this results in making extra mortgage payments. Paying down your loan can help to eliminate PMI, which could end up lowering your monthly payment. Not all loan servicers have a bi-weekly payment program.

Ways to lower your monthly mortgage payment

Smart mortgage management can involve finding ways to lower your monthly payments. This can help you stay up-to-date with your payments if your financial circumstances change. It may also free up money in your monthly budget for home improvement projects. Consider these options for lowering your monthly payments.

Make the largest down payment possible

Of course, this is an option you'll need to do before you buy your home. Making a larger down payment can reduce your monthly payments. It can also eliminate the need for expensive mortgage insurance. If you've already purchased your home, keep this in mind for refinancing. If you come into some money, you may be able to refinance your home and put your windfall towards your principal balance.

Refinance at a lower interest rate

When interest rates drop below your current rate, it's a good time to consider refinancing. Even a small drop in interest can mean a lower monthly payment and may add up to thousands of dollars saved over the life of your mortgage. If you think you can qualify for a home loan at a lower interest rate, it's worth talking to a Home Lending Advisor about your options.

Get rid of your PMI payments

Your mortgage payments may include private mortgage insurance (PMI) on a Conventional loan if you put less than 20% down. PMI can add hundreds of dollars a month to your monthly mortgage payment, but you don't have to pay it forever. Once your loan drops below 80% of the value of your home, you can ask to have the PMI taken off your monthly payments. Consider using a home value estimator to see if you may be eligible.

What to do when you can't pay your mortgage

Despite your best efforts, there may come a time when you’re not able to pay your mortgage. If this happens, you'll want to:

• Create a list of your current income and expenses. This may give you some insight into areas where you can cut back expenses. It’s also necessary to share your financial situation with your mortgage lender, which will be your next step.
• Contact your lender right away. As soon as you know you won't be able to make your mortgage payment, get in touch with your lender. Let them know how your circumstances have changed and why you won't be able to make your payment. They may be able to help.
• Consider a mortgage modification. Some lenders may be able to offer you a mortgage modification. This is when they modify the terms of your loan to reduce your monthly payments without refinancing. Often, this means adding years to the loan and helping you catch up on any missed payments.

The important thing is to act quickly. Missing even a limited number of payments could start the foreclosure process.

Successfully managing your mortgage will have a positive financial impact on your future. Understanding how to calculate your payments, making your payments on time and actively looking for ways to save can lead to better financial opportunities in the future. Talk to a Home Lending Advisor about your mortgage options.