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A California Home Buyer’s Guide to Monthly Mortgage Payments

Housing affordability can be measured in different ways, both short-term and long-term. But when buying a home in an expensive real estate market like California, home buyers are typically most concerned with the size of their monthly payments.

Common questions from home buyers include:

  • How is my monthly mortgage payment calculated?
  • What components make up my monthly mortgage payment?
  • What can I do to reduce the size of my monthly payments?
  • Will my payments change over time or stay the same?

This guide answers all of these questions and more. It will give you the knowledge you need to make smart mortgage decisions when buying a home in California.

Breaking Down the Monthly Mortgage Payment

You probably already know that the monthly payments on a mortgage loan include the actual amount you owe for that month, along with an interest charge.

What you might not know is that there are actually four, and sometimes five, components that make up a typical monthly mortgage payment. And they can all contribute to the actual amount you have to pay each month, as a California homeowner.

When describing the individual components of a mortgage payment, lenders often use the acronym PITI (pronounced “pity”). Here’s what those letters stand for:

  • Principal: The amount borrowed to buy the home.
  • Interest: The cost of borrowing money, expressed as a percentage of the loan amount.
  • Taxes: Property taxes assessed by local government entities.
  • Insurance: Homeowner’s insurance used to protect against damage or loss.

You might also encounter an extended version of this acronym called PITIMI. The additional “MI” stands for mortgage insurance.

Borrowers who use a conventional loan with less than 20% down often have to pay for private mortgage insurance, or PMI. In California, PMI can add several hundred dollars onto a homeowner’s monthly mortgage payments. So it’s an important consideration.

FHA loans also require mortgage insurance, but it’s provided through the federal government. Here again, it brings an additional cost that increases the size of the monthly payments.

Key takeaway: The typical monthly mortgage payment in California includes more than just the principal and interest. Monthly payments often include taxes and property insurance as well, and sometimes mortgage insurance on top of that.

Fixed-Rate Mortgages vs. ARMs

The type of loan you choose can also affect the size of your monthly mortgage payments.

For instance, an adjustable-rate mortgage (ARM) loan could help you minimize your monthly payments during the first few years of homeownership. ARM loans typically offer a lower interest rate during the first few years, compared to the more popular fixed-rate mortgage option.

As its name suggests, an adjustable-rate mortgage loan has an interest rate that can change over time. But they usually start off with a fixed rate during the first few years. For example, the popular “5/1 ARM” has a fixed interest rate for five years, followed by annual adjustments thereafter.

By using an ARM loan, California home buyers might be able to secure a lower rate and therefore reduce their monthly mortgage payments.

When considering this strategy, you also have to think about your long-term plans and the risks associated with an adjustable mortgage. If interest rates rise during the first few years of an ARM loan, your monthly payments could go up when the loan begins to adjust.

Extending the Term for Smaller Monthly Payments

California home buyers can also reduce their monthly mortgage payments by extending the loan term. This is an important consideration that can affect you in both the short and long-term.

In this context, the “term” refers to the total length of time you have to repay the borrowed money. It’s the duration of your loan agreement. This timeframe significantly impacts your monthly payment amount and the total interest you’ll pay throughout the loan.

Let’s look at an example using realistic numbers:

As of spring 2024, the median home value in California was around $780,000. Assuming a down payment of 6% (the average for first-time buyers in California), the monthly mortgage payments might look something like this:

  • 30-year fixed mortgage: ≈ $4,888
  • 15-year fixed mortgage: ≈ $6,484

California home buyers who want to minimize their monthly payments are almost always better off with a longer term. That’s why the 30-year fixed-rate mortgage is the most popular home loan option in the state of California.

Amortization: How the Payments Change Over Time

Amortization is another important concept for California home buyers to understand, because it affects how your monthly payments change over time.

Amortization is the process of gradually paying off a loan over time through regular payments. It also describes how the monthly mortgage payments are structured to ensure that both the principal and the interest are paid off over the term.

At the beginning of a mortgage loan term, most of the monthly payment goes towards paying the interest. That’s because the interest is calculated based on the remaining principal balance, which is highest at the start of the loan

In contrast, a smaller portion of the payment goes towards reducing the balance.

But as the loan term progresses and the balance decreases, the situation reverses. A greater portion of each monthly payment goes towards reducing the principal, while the portion applied to the interest decreases.

By the end of the loan term, the majority of the monthly payment goes towards paying off the principal, and the interest portion becomes relatively small. This gradual shift from “interest-heavy” to “principal-heavy” payments is known as the amortization schedule.

Here’s why all of this matters to a home buyer and future homeowner:

  • Early payments have less impact: A bigger chunk of your money goes towards interest initially, so it might feel like it’s taking forever to pay off the house. Don’t get discouraged!
  • Focus on the long game: Over time, more and more of your payment goes towards principal, which means you’re building equity (ownership) in your home faster.
  • The sooner you pay it off, the better: If you can afford to make extra payments towards the principal, you can shrink the interest payments even faster and save money in the long run.

We hope this guide gives you a better understanding of how mortgage payments work when buying a home in California. If you have questions about this subject or would like to receive a mortgage quote, please contact our staff!

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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