Mortgage 101: What’s In Your Mortgage Payment?
A mortgage payment is made up of four main components: Principle, Interest, Taxes, and Insurance (PITI).
Principle: The original amount of the loan.
Interest: This is the cost charged for borrowing money. The amount of interest for the month is calculated based on the outstanding principal balance. As the term of the mortgage proceeds, the ratio between the principal and interest amounts shifts in each payment. As the principal balance is paid off, the interest payment goes down.
Taxes: Your property taxes are assessed by the county you live in. Property taxes are typically collected as part of your mortgage payment and put the into an escrow account until the bills are due.
Insurance: Payment for homeowner’s insurance to cover damage to your home or property. Like your taxes, homeowners insurance is often paid for as part of the mortgage payment and put into an escrow account. You pay 1/12th of the annual premium each month and your lender then pays your insurance company once each year.
There are several factors that determine how much your monthly mortgage payment will be. These factors include how much of a down payment you pay and the mortgage program you choose.
If you purchase a home for $250,000 with a 20% down payment, this is what your monthly payments will look like….
Summary
Home Price $250,000
20% Down Payment $50,000
Mortgage Term 30-year fixed
Interest Rate 4.5%
Property Taxes 1.2%/year
Homeowners Insurance: $800/year
Payment Breakdown
Principle & Interest = $1,013
Property Taxes = $250
Homeowners Insurance = $67
Monthly Mortgage Payment = $1,330
What if you don’t put 20% down?
If you purchased a home with less than 20% down, you may be required to pay private mortgage insurance (PMI). This protects the lender if you should default on your loan.
Here’s an idea of what PMI could add to your mortgage payment, based on down payment percentages.
10% Down Payment 5% Down Payment
Summary Summary
Home Price $250,000 Home Price $250,000
10% Down Payment $25,000 5% Down Payment $12,500
Mortgage Term 30-year fixed Mortgage Term 30-year fixed
Interest Rate 4.5% Interest Rate 4.5%
Property Taxes 1.2%/year Property Taxes 1.2%/year
Homeowners Insurance $800/year Homeowners Insurance $800/year
Payment Breakdown Payment Breakdown
Principle & Interest = $1,140 Principle & Interest = $1,203
Property Taxes = $250 Property Taxes = $250
Homeowners Insurance = $67 Homeowners Insurance = $67
Mortgage Insurance = $111 Mortgage Insurance = $150
Monthly Payment = $1,567 Monthly Payment = $1,670
It’s important to take all four – Principal, Interest, Taxes and Insurance – into consideration when determining how much of a house you can afford. Use our mortgage payment calculator to estimate your monthly payments.
