Components of a Monthly Mortgage Payment

There are several different components of a Monthly Mortgage Payment. Before you even get started looking for a house, there are a few things you need to consider. Knowing what’s included in your Monthly Mortgage Payment and will it fit my budget.

Let’s dive deeper into what the Components of a Monthly Mortgage Payments are.

PITI

If you haven’t heard the term “PITI” before, it’s an acronym commonly used in the Mortgage Industry. The acronym stands for, Principal, Interest, Taxes, Insurance. These components of PITI are essentially what makes up your Monthly Mortgage Payment.

There are a few other things to take into consideration as well such as Homeowner Association (HOA) fees, Private Mortgage Insurance (PMI), etc. but for now we will stick to PITI.

Principal

The first leg of PITI is going to be principal. This is the initial chunk of money that you are borrowing from the lender to buy the house.

Let’s say for example, you found a house for $100,000 and you put 20% down which would be $20,000 and your planning on financing the rest. The principal would be the $80,000 that you borrow from the lender to buy the house.

Interest

Interest is the next leg on PITI, and this is where the lender keeps their lights on. This is where the lender keeps their business running and food on the table. As much as you might think they like you, they just simply won’t let you borrow money for free.

Interest is a percentage of the principle that the lender charges in exchange for letting you borrow their money. Mortgage Rates are constantly changing, which is best to get a Fix Rate Mortgage which locks in that specific interest rate for the life of the loan.

Tax

Whether you bought a house with cash, or financed it, there's really no way of getting around paying taxes. Property taxes are your local governments way of paying for public schools, roads and transportation, police, and firefighters.

Local government charges property tax every year. So you might be asking “if they charge property taxes once a year, then why am I paying monthly”? Good question. Every month you pay a portion of your property taxes and your lender taxes that portion and puts it in an escrow account.

Then, at the end of the year when your local government is looking for their property taxes then your lender will take that money and pay your taxes.

Insurance

Last but certainly not least, we have Insurance as the fourth and final component of our Monthly Mortgage Payment.

Everyone needs good insurance for their house, after all it will be the biggest investment for 90% of people. Remember how we talked about Taxes being put into an escrow account? Insurance works the same way. Each and every month, included in your Monthly Mortgage Payment, your lender collects your insurance payment and puts it in your escrow account.

When your insurance company comes knocking on your door for their mortgage premium, your lender will use the money in the escrow account.

There are other factors that can come into play such as HOA fees and PMI, as we mentioned earlier. But the four components of the PITI generally will make up the core of your Monthly Mortgage Payment.

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