What is Included in a Mortgage Payment?
PITI, an acronym for the four main components of a mortgage payment: principal, interest, taxes and insurance. Together they make up what you pay on your mortgage every month. Understanding your potential PITI helps both you and the lender determine what you can afford when shopping for a home.
The basic mortgage payment consists of two components: principal and interest. Principal is the loan amount you initially borrow from a lender to buy your home. It's factored into your monthly payment and paid off throughout the life of your loan.
Once you purchase a home and begin making payments, the amount of principal you pay each month is relatively low. As the loan ages, more and more of your monthly payment will go toward the remaining principal amount.
Interest is the percentage of the principal you pay over the life of the loan to your mortgage company as a fee for lending the money. The amount that goes to interest will continue to decrease as you pay down your loan. Luckily, you’ll potentially be able to claim a mortgage interest deduction on your taxes to further offset the interest you owe each year.
If you have a fixed-rate mortgage, the percentage you pay in interest every month will remain the same for the life of the loan, no matter what happens with the real estate market.
No matter where you live, you'll pay a property tax on your home. The amount you pay is based on a percentage of your property value, which can change from year to year. The actual amount you pay depends on several factors, including the assessed value of your home and local tax rates. Typically, every county has its own taxation system.
If the assessed value – not necessarily the same as the market value – of your property increases, the taxes you pay on your property will increase with it.
There are two main types of insurance that can factor into your mortgage payments:
Homeowners insurance: Homeowners insurance works as a safety net to protect your home and finances in the event of an environmental disaster or an accident on your property. If something were to happen, your homeowner’s insurance would typically cover the cost of repairs to bring your property value back to where it was before.
Mortgage insurance: Mortgage insurance doesn't apply to everyone, but if you can't make a sizable down payment on your home, you'll likely have to pay a premium. Since low down payments are risky for lenders, they might require mortgage insurance to cover their investment if the loan goes into default. Depending on the type of home loan you have, you might pay (private mortgage insurance) or a mortgage insurance premium (MIP).
Along with taxes, the insurance portion of your mortgage payment may go into an escrow account to pay back those costs.