Understanding Your Mortgage Payment
When you buy a home, the amount you borrow from the bank is only part of what you pay every month. A true mortgage payment consists of four parts, commonly known as PITI.
Principal and Interest
This is the core of your loan. Principal is the repayment of the actual amount you borrowed to buy the house. Interest is the fee the lender charges you for borrowing that money. In the early years of a 30-year fixed mortgage, the vast majority of your payment goes toward interest, not principal.
Taxes and Insurance (Escrow)
Because the bank uses your house as collateral, they want to ensure you don't lose it to a tax lien or a fire. To guarantee these bills get paid, lenders establish an escrow account. Every month, they collect roughly 1/12th of your annual property tax bill and 1/12th of your annual homeowners insurance premium, and pay those bills on your behalf.
Private Mortgage Insurance (PMI)
If you put down less than 20% of the home's purchase price, conventional lenders require you to pay for PMI. This insurance protects the lender—not you—in case you default on the loan. PMI typically costs between 0.5% and 1.5% of the total loan amount annually, divided into monthly payments. Once you build up 20% equity in the home, you can usually request to have PMI removed.