Understanding the elements of your mortgage payment is as easy as remembering four letters – P, I, T, I. The mortgage industry uses the acronym PITI, which stands for principal, interest, taxes and insurance, to break down the components of homeowners’ mortgage payments.
Every mortgage contains at least two parts: principal and interest. Principal is the amount of money you have borrowed for your home purchase and interest is the cost of borrowing that money. If you have a fixed-rate mortgage, your principal and interest will remain the same for the life of the loan.
The last two portions of a mortgage payment, taxes and insurance, are typically paid into an escrow account. Escrow is a financial tool created in order to store money collected by a lender. This allows the lender to collect funds to pay for items such as homeowners insurance, property taxes, and private mortgage insurance, when applicable.
When taxes and insurance are due, the lender pays them for the borrower from the escrow account, streamlining the process. This amount of a borrower’s mortgage can increase or decrease over time, even with a fixed-rate mortgage.
For example, the monthly mortgage payment for a homebuyer purchasing a $180,000 home with a 5 percent down payment, interest rate of 4 percent, $720 homeowners insurance premium, and $2,300 in yearly property taxes would have a breakdown like this:
- Principal & Interest: $816
- Property Taxes: $192
- Homeowners Insurance: $60
- Private Mortgage Insurance: $114
- Total Monthly Payment: $1,182
Keep in mind that mortgage payments will include different items for different home types and financing options. A monthly mortgage payment for a condo or townhome may include condo or homeowner's association fees. A borrower who puts down 20 percent or more of their home’s purchase price isn’t typically required to pay monthly private mortgage insurance.
If you are looking for more homebuying information, our Mortgage 101 Handbook is a great resource for first-time and repeat homebuyers.