Understanding what goes into a mortgage payment is very simple. A monthly mortgage payment includes at least two parts: principal and interest. Principal is the amount of money you have borrowed and interest is the cost of borrowing that money.
For most homeowners, there is also a third part that is paid into an escrow account. Escrow is a financial instrument created in order to store money collected by a lender. The escrow account allows you to pay for things like homeowners insurance, property taxes, condominium and association feeds and mortgage insurance, if applicable. When your taxes and insurance are due, the lender pays them for you from the escrow account. This amount of your mortgage can increase or decrease, even with a fixed-rate mortgage. Therefore, your mortgage will include principal, interest, taxes and insurance, also known as the acronym PITI.
For example, you find a home that costs $170,000. You are able to make a down payment of 5 percent, or $8,500. The annual property taxes are $1,200 and the annual homeowners insurance is $720. Because your down payment is less than 20 percent, you will pay private mortgage insurance (PMI), as well.
With a 30-year fixed mortgage and an interest rate of 4.5 percent, your PITI with PMI is as follows:
- Principal and Interest: $818
- Monthly Property Taxes: $100
- Monthly Homeowners Insurance: $60
- Monthly Private Mortgage Insurance: $94
Total Monthly Payment: $1,073
Looking for more information on buying a home? Our Mortgage 101 Handbook is the ultimate guide for First Time Home Buyers.