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How can you better understand your mortgage payment?


There are two main parts to your mortgage payment: the down payment and your monthly payment.

The down payment is the simplest part. The down payment is the amount you pay upfront at the time of purchase. The more money you put down, the less you have to borrow and repay with your monthly mortgage payments.

You'll likely be paying most of your purchase price through your monthly mortgage payments. These monthly payments cover four components, often known by the acronym PITI:

  • Principal: This is the amount of money you've borrowed to cover the purchase price you still have to pay minus your down payment.
  • Interest: A percentage of the principal, this is the money you pay to the lender for the loan.
  • Taxes: You may be paying a portion of your property taxes each month in your monthly mortgage payment. A third party keeps this portion of your monthly payment in escrow until the taxes are due.
  • Insurance: You may also be paying for different kinds of insurance as part of your monthly mortgage payment. The insurance might just be to cover hazards to the house, such as fire, storms, thefts, floods, etc. However, if you don't yet have a lot of equity in your home, you're likely also paying private mortgage insurance against your ability to pay off your mortgage.

The final important point to understand about your monthly mortgage payment is that you're paying both interest and principal each month, but for most of the life of the loan you're paying mostly interest. This is called amortization. What this means is that you're paying a great deal more in interest on the loan than the principal of the loan itself. This may sound like a bad deal, but if you don't have a quarter of million dollars to pay upfront for your home, being able to pay off your house over 30 years is really a pretty good deal.


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