Updated December 2023
Monthly mortgage payments make up a significant portion of a household’s expenses, but homeowners often overlook the details. However, understanding the structure of mortgage payments will not only help you to determine how much you can afford if you’re looking to purchase a new home or refinance your mortgage; it can also give you an idea of how long it will take to pay off your loan and what it will cost you over time.
In this post, we’ll explore exactly what makes up a mortgage payment for a Fixed-Rate Loan, how to make sense of your loan estimate, and how your monthly mortgage payments will change over time. We’ll also explain how the components of the payment differ for other types of loans.
What Are the Components of a Monthly Mortgage Payment?
The four main components that comprise the monthly mortgage payment for a Fixed-Rate Loan are collectively known as “PITI”: principal, interest, taxes, and insurance. Let’s take a closer look at what these terms mean.
1. Principal
Principal refers to the actual amount of money left to be repaid on your mortgage loan. Each month, you pay a certain percentage of the loan as part of your monthly payment, and the percentage paid increases over time. This means that when you first begin paying off your mortgage, the percentage of your monthly mortgage payment that goes toward the principal will be lower than for someone who has been in their home for a number of years.
Want to learn more about the mortgage loan process? Read “Your Comprehensive Guide To The Mortgage Loan Process.”
2. Interest
Another important component of your mortgage payment is the interest, which the lender charges you in exchange for loaning you the money for your home. The interest rate is a percentage of your total loan set by the lender, and for a Fixed-Rate Loan will remain the same for the duration of your mortgage term. However, when you first begin paying off your mortgage, a larger portion of your payment will go toward interest, as your loan will be higher.
Over time, as you pay toward the principal, you will pay less interest each month as your loan decreases, and more of your monthly payment will contribute to lowering the principal. This process is called amortization and means that as you reach the end of your loan, most of your payment will be used to pay off the last of your principal. You can use our mortgage calculator to find out your yearly amortization schedule.
3. Taxes
This component of your monthly mortgage payment refers to property tax, which is the fee the owner of a property must pay to their local government based on the assessed value of their property. Property tax is due either annually or bi-annually. Your local government will calculate your property tax rate. Typically, a property’s taxes will be reevaluated by a local tax assessor every one to five years, so the amount of tax you’ll pay each month could change over time.
If you’d like to learn more about your county’s tax collector agency, you can search by zip code by visiting Nationwide Environmental Title Research’s Public Records Online Directory.
4. Insurance
Two different types of insurance could be included in your monthly mortgage payment. The first is homeowner’s insurance, which pays for losses and damages to your property if something unexpected happens, such as a fire or robbery. Your lender will generally require proof that you have homeowner’s insurance before closing on your loan, as they’ll want to ensure your property is protected.
Many lenders will require you to pay your property taxes and homeowner’s insurance using an escrow account, ensuring you make both of these payments. Each month, a portion of your monthly payment will be sent to your escrow account, and then your lender will pay your taxes and homeowner’s insurance when they’re due on your behalf. As the amount you’re required to pay for taxes and homeowner’s insurance could change over time, your monthly escrow payment could fluctuate. If your lender does not require an escrow account, you can still request one; it will make it much easier for you to budget for your insurance and taxes when they’re due by setting aside a small amount of money for them each month.
The second type of insurance you might need to pay is mortgage insurance; this protects the lender in the event the customer falls behind on making payments. Typically, if your down payment is less than 20% of the purchase price of your home, you will be required to pay mortgage insurance. Mortgage insurance is also often required on FHA Loan applications. If you are required to pay mortgage insurance, it will either be included in your monthly mortgage payment, your costs at closing, or both.
Understanding Your Loan Estimate
A common mistake homeowners make when looking at their loan estimate is to just look at the principal and interest payments and assume this will be all they should expect to pay each month. This could lead to an unpleasant surprise in the future when they discover their monthly bill is much higher.
When reviewing your mortgage loan estimate, you should look for the sum labeled “estimated total monthly payment” — this will include all components of your payment, including taxes and insurance. You’ll notice this total will differ as you pay off more of your principal over the years.
What If I Don’t Have a Fixed-Rate Loan?
If you don’t have a Fixed-Rate Loan, you likely have an Adjustable-Rate Mortgage (ARM), which is a type of Conventional Loan where the interest rate used to determine how much interest you pay on your monthly mortgage payment will change over time.
You should expect the interest you pay each month to be lower when you start paying off your mortgage because you’ll likely be offered a reduced introductory rate for a certain amount of time. Then, your interest rate might increase or decrease over the course of your remaining mortgage period, depending on changes to the economy.
If you have an Adjustable-Rate Mortgage, you must keep up-to-date on the current mortgage rates so that you know if your monthly payment is likely to change in the months ahead.
Discover Which Mortgage Option Is Right for You
Now you know what makes up a monthly mortgage payment, it’s time to start your homebuying journey. We understand deciding which mortgage loan is right for you can be a complicated process — that’s why our expert Loan Officers are here to provide advice and guidance to help make your home loan process run smoothly.
Discover our wide range of home mortgage loans and request a free consultation with one of our Loan Officers today.
Article Sources
- Bankrate — “What is PITI?” Aug 23, 2023
- CNBC — “What is mortgage amortization, and how do you use it to save money on your home loan?” May 13, 2023
- Investopedia —“Property Tax: Definition, What It’s Used for, How It’s Calculated” Nov 29, 2023
- Nationwide Environmental Title Research (NETR) — “Public Records Online Directory” Nov 29, 2023
- Investopedia — “How Escrow Protects Parties in Financial Transactions” Aug 17, 2023
- Consumer Financial Protection Bureau — “Loan Estimate Explainer” Nov 29, 2023
- Consumer Financial Protection Bureau — “On a mortgage, what’s the difference between my principal and interest payment and my total monthly payment?” Aug 28, 2023
- Bankrate — “5 types of Mortgage Loans for Homebuyers” Nov 6, 2023
- Forbes Advisor — “Current Mortgage Rates” Nov 29, 2023.
