What is My Mortgage Payment Made of?
There are 4 different factors that make up your monthly mortgage payment: Principal, Interest, Taxes, and Insurance. Lenders combine these 4 elements into one payment, known as PITI, which you may have come across in your searches as you hunt for a mortgage loan and lender that best suits you. Your monthly mortgage payment can fluctuate over time depending on various factors, even if you have a fixed-rate mortgage. Understanding the 4 elements that comprise your mortgage payment and their potential changes can help you ensure that you aren’t taking on a larger payment than you can afford.
We’re here to help you understand what your mortgage payment is made of with a breakdown of each component of PITI:
The “P” in PITI is for the Principal, which is the amount that you owe for your mortgage loan before any interest is added. For example, if you purchase a home for $500,000 with a 20% down payment of $100,000, your principal amount would be $400,000. However, due to interest, you will pay more than $400,000 throughout the life of the loan. Mortgage loans are structured so that the amount of principal you are repaying starts out lower in the beginning and increases over time.
The first “I” in PITI is Interest. Your interest rate is a percentage that shows how much you’ll pay your lender each month as a fee for borrowing money. Your mortgage lender calculates interest as a percentage of your principal over time. Mortgage payments apply more of the payment towards interest at the beginning of the loan term, then the ratio gradually shifts over time to apply more of the payment towards principal. You may hear the term amortization in reference to your principal and interest payments. Amortization is a scale that tells you how much of your monthly mortgage payment is applied to your principal and how much is applied toward interest. It’s possible to reduce how much interest you owe by making extra payments or choosing a shorter loan term to pay off your mortgage faster.
The “T” in PITI is for the Taxes you must pay on your property. Taxes are an often-overlooked cost of home ownership, so it’s important to take it into consideration when determining how much you can afford. Property taxes and real estate taxes are assessed by local governments and used to fund public services like schools, libraries, road maintenance, public safety, and other community initiatives. Property taxes are assessed and payable annually, however many homeowners prefer the convenience of having their property taxes included in an escrow account. By holding the taxes in escrow, your lender divides the total tax amount due by 12 and 1/12 of the tax is added to your monthly mortgage payment. The escrow account functions like a forced savings account and your lender must pay the funds to your property tax bills when they are due. Most states require you to get an appraisal of the property in order to accurately estimate your taxes. Your mortgage lender typically includes the cost of an appraisal in their closing costs, and some lenders offer loans with a waived appraisal fee. Your taxes can vary from year to year depending on a variety of factors, which can cause your PITI to rise and fall over time.
The second “I” in PITI stands for Insurance. Like with taxes, insurance premiums can also be paid with each monthly mortgage payment and held in escrow until the bill is due. Also similarly to taxes, your insurance payment will vary depending on various factors. Every insurance company used their own unique formula to calculate your insurance rate. There are two types of insurance that may apply to you mortgage payment: homeowners insurance and mortgage insurance.
- Homeowners Insurance: Your lender will require you to have homeowners insurance in order to protect their interest in your home in the event of damage to the property. If you live in an area prone to natural disasters like tornadoes/hurricanes, floods, or earthquakes, it may be in your best interest to purchase additional coverage.
- Mortgage Insurance: You’ll likely have to pay Private Mortgage Insurance (PMI) if your down payment is less than 20%. This protects your lender from loss in the event that you default on the mortgage loan and your lender has to foreclose on the home. However, once you’ve built up 20% equity in your home, you no longer have to have PMI, which will reduce your total PITI payment.
If you’re ready to apply for a mortgage loan, let our team help you get the loan you need. Visit our Mortgage Loan Center to learn more about the mortgage process, use our Home Buying Calculators to get a picture of what your home loan will look like, and check out our Buying a Home video series on YouTube for more information about home buying. Apply for a mortgage loan online or set up an appointment to speak with one of our Mortgage Loan Officers.
At Robins Financial Credit Union, our mission is to enhance the financial well-being of our members and community. We honor this commitment by providing educational content to help you make the most of your finances. Read our other blog articles to help you gain the financial knowledge you need to succeed.