Is HOA and Mortgage the Same Thing?

Is HOA and Mortgage the Same Thing?

If you’re a new or prospective homeowner, you’ve probably heard the terms “mortgage” and “HOA” fees tossed around. But do you really understand what each one means and how they’re different?

For many, commingling these two housing cost buckets is an easy mistake to make. After all, they’re both recurring monthly expenses that your lender requires if you live in a community with a homeowners association (HOA).

However, mortgage and HOA online payments are actually quite distinct from one another. Failing to understand the differences can lead to budgeting mishaps and misallocated funds down the road. So let’s take a look at both, and what your HOA fees cover compared to your mortgage payment.

 

 

Breaking Down Mortgages vs. HOA Fees

At their core, a mortgage and HOA fees cover entirely different expenses related to your home:

Your Mortgage Payment 

This is the money you pay monthly to your lender (bank, credit union, etc.) as part of the amortized loan you took out to purchase the home itself. The mortgage payment goes towards:

  • Repaying the principal loan balance over time
  • Covering the interest accrued on that loan balance
  • Funding your escrow account for property taxes and homeowners insurance

Essentially, the mortgage payment is steadily paying down your debt until you fully own the home after 15, 20, or 30 years, depending on the loan term.

Your HOA Fees 

These are separate, mandatory monthly dues paid to your community’s homeowners association, not your lender. HOA fees are designed to cover:

  • Maintenance and upkeep of any shared community spaces, amenities, and landscaping
  • Funding for the HOA’s operational costs and staffing
  • Building up reserves for major repairs and renovations down the road

Unlike mortgage payments, HOA fees are not paying down any debt or loan. They simply finance the ongoing operations and maintenance of your neighborhood’s amenities and common areas.

Remember – while your mortgage is paying for your home itself, while HOAs fees maintain the community around that home. They are parallel but completely distinct expenses.

Why the Distinction Matters

Keeping mortgage and HOA costs properly separated in your mind (and budget) is crucial for a few key reasons:

Debt vs. Non-Debt Payments

Only mortgage payments are truly going towards paying back debt you’ve taken on. HOA fees are simply membership dues for living in that neighborhood, not any borrowed sums.

DTI Ratio Impacts

For mortgage qualification, your debt-to-income (DTI) ratio weighs heavily. HOA fees count toward your recurring household costs and thus maximum DTI. But mortgage payments cover an existing debt load.

Payment Delinquencies

Failing to pay your mortgage can quickly lead to default, foreclosure proceedings, and major credit damage. Missing HOA dues has less drastic repercussions, like suspended amenity access and eventual liens.

Tax Deductions 

Mortgage interest is still tax-deductible for many homeowners. HOA fees are considered non-deductible membership expenses.

While both are vital monthly obligations, grasping the fundamental differences between mortgages and HOA fees helps you budget accurately, qualify properly, and avoid dangerous delinquency paths. Don’t fall into the trap of viewing them as identical line items!

Where Payments Go

Your mortgage payment goes directly to your lender (bank, credit union, etc.) who issued you the home loan. The payment chips away at your outstanding principal balance owed as well as the interest accrued.

HOA fees, on the other hand, get paid to your community’s homeowners association – a legal entity separate from your lender. The HOA manages and directs how those fees get spent within the neighborhood – which is why knowing what your HOA fees cover is key.

What If You Don’t Pay?

Failing to make your mortgage payment can quickly put you in default, damage your credit, and potentially lead to foreclosure proceedings where your lender can seize the home. It’s a very serious delinquency.

While not paying HOA dues is still a violation of legal agreements, the ramifications aren’t as immediately dire. The HOA cannot directly foreclose, but can revoke privileges, place liens on the property, and potentially force foreclosure as an absolute last resort after many missed payments.

Escrow Account Usage 

Part of your monthly mortgage payment goes into an escrow account managed by your lender. That escrow fund is then used by the lender to pay your property taxes and homeowners insurance when those bills come due.

However, HOA fees do not flow through your mortgage escrow account. You must pay HOA fees separately and directly to the HOA itself each billing cycle.

Calculating Mortgage vs HOA Payments

When qualifying for a mortgage, lenders will scrutinize your debt-to-income (DTI) ratio – comparing your expected monthly debt obligations to your income.

While mortgage principal and interest get counted as debt obligations, HOA fees are categorized differently as recurring membership expenses or housing costs.

So each plays a somewhat different role in your overall DTI calculation, which highlights how they are distinct line items even if often paid together each month.

Know The Difference Between HOAs and Mortgage Payments

As you can see, while mortgages and HOA fees are both major monthly expenses for homeowners, they are fundamentally different things. 

Your mortgage payment goes towards paying down the loan you took to purchase your home. The HOA fees are dues paid to your community’s homeowners association to cover shared amenities, maintenance, and operations.

Keeping these two line items properly separated in your mind and budget is crucial. As you go through the home buying and ownership process, understand what each payment covers, who you pay it to, and the associated consequences if you miss payments or default. Doing so will ensure you stay on top of your housing expenses and avoid any nasty financial surprises down the road!

FAQ

Are HOA fees included in my mortgage payment?

No, HOA fees are completely separate from your mortgage payment. You have to pay HOA dues directly to the homeowners association itself.

What is the meaning of HOA in a mortgage?

In the context of a mortgage, HOA refers to the homeowners association fees that most lenders require you to pay if purchasing a home in an HOA community. The lender wants to ensure you can afford the HOA dues on top of your mortgage payment.

Do HOA fees count towards my debt-to-income ratio?

While not the same as your actual mortgage debt, HOA fees do get calculated into your overall debt-to-income ratio that lenders use to qualify you for a mortgage. So, higher HOA fees can impact your ability to gain approval.

What happens if I don’t pay my HOA fees?

If you don’t pay your required HOA fees, the homeowners association can revoke privileges like amenity access, charge late fees, place liens on your property, and potentially foreclose as an absolute last resort.

Can HOA fees be paid from my mortgage escrow account?

No, HOA fees cannot be paid out of your standard mortgage escrow account. You must pay HOA dues separately and directly to the HOA itself on their required schedule.

Is it better to pay my HOA fees annually or monthly?

Most HOAs allow you to either pay fees annually as a lump sum, or in smaller monthly or quarterly installments. Some may offer a small discount for paying the full year’s dues upfront annually.

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