What's In a Mortgage Payment?
One of the questions we are most commonly asked when reviewing rates and payments with our clients is:
"What's included in my monthly mortgage payment?"
Generally speaking, a mortgage payment is comprised of four main components. These components are commonly referred to using the acronym PITI.
Principal - The amount of money you originally borrowed to purchase your house. For example, if you bought a $400,000 house with 10% down ($40,000), the starting principal balance on the loan would be $360,000.
Interest - Money paid to your lender as a fee for loaning you money to purchase your home. On a fixed-rate loan, the interest rate never changes for the life of the loan. On an adjustable-rate loan, the interest rate is set for an initial period and then resets (within pre-determined limits) every couple of years.
Tax - Property taxes are paid to fund public services such as roads, schools and infrastructure. Property taxes are calculated as a percentage of your home's value. The percentage changes depending on which county you live in.
Insurance - Homeowner's insurance is required in order to obtain a home loan. The purpose of homeowner's insurance is to protect you (and your lender) from catastrophes such as fire and flood.
(Tax and insurance payments can be paid to your lender in monthly installments or payments can be maid in lump sum to the county and your insurance company. For more information, check out our post on Escrow Accounts.)
Other monthly payments to consider:
Private Mortgage Insurance/ Mortgage Insurance Premium - For borrowers in higher-risk or certain government loans, payment of monthly mortgage insurance might be required. Mortgage insurance protects your lender in the event default on your mortgage were to occur. For most mortgages, the requirement to maintain mortgage insurance is reduced/eliminated as time passes.
HOA Dues - Although not included as part of your monthly payment to your lender, HOA fees for condominiums, townhouses and Planned Urban Developments will be factored in when determining a borrower's ability to make their monthly housing payment.