Components of a mortgage payment
Your monthly mortgage payment has many parts: the loan principal, loan interest, taxes, homeowners insurance, and potentially mortgage insurance. If you’ve never owned a home, you may be surprised by how many costs make up a single monthly payment. By including these costs in one monthly payment, your lender is able to keep those payments organized. Let’s look at the details of each part:
- Loan principal: Principal is the amount of money you borrowed to buy your house.
- Loan interest: Interest is the amount you pay to borrow money from your lender. It usually is a percentage of the amount you borrowed.
- Property taxes: Your mortgage payment will typically include estimated annual real estate taxes, also known as property taxes.
- Mortgage insurance: If your down payment is less than 20%, you will likely have private mortgage insurance (PMI) included in your monthly payment. This is an added insurance policy that protects the lender if you are unable to pay your mortgage.
- Homeowners insurance: Homeowners insurance protects you from things like disaster or theft. Your monthly mortgage payment will usually include your annual homeowners insurance premium.
Where escrow comes in
Escrow usually includes property taxes, mortgage insurance, and homeowners insurance. If you have an escrow account as part of your mortgage, part of your monthly payment funds that account; then your lender pays these on your behalf when those bills are due. This setup can help you plan for these payments and ensure you have the money set aside for each.
However, if your mortgage does not include an escrow account, you will be responsible for making the full payments on your property taxes and homeowners insurance when those bills are due.
Video: The components of a mortgage payment
This short video explains all the pieces that can make up your monthly mortgage payment and how, over time, your payment helps you protect and become the owner of your home.
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