Your Total Monthly Payment
Your monthly mortgage payment typically is made up of four components: principal, interest, taxes and insurance, together known as PITI.
The principal refers to the
part of the monthly payment that reduces the remaining balance of the mortgage.
The interest is the fee charged for borrowing money. You can determine the
amount of principal and interest by using our Mortgage Payment
Calculator.
Taxes refer to property taxes your community levies, which are generally based on
a percentage of the value of your home. The lender usually collects 1/12th of
the yearly property tax bill each month. The lender collects taxes in advance
and places the money in an escrow fund.
Lenders won't let you close on your home loan if you don't have hazard insurance
to cover your home and your personal property against losses from fire, theft, bad
weather and other causes. The insurance amount is collected and paid much like
the taxes. Each month 1/12th of the insurance bill is collected and stored in an
escrow account until the bill is due. Even if you pay cash for your home it is a
good idea to buy hazard insurance in the event your home is damaged or
destroyed.
Principal and interest comprise the bulk of your monthly payments in a process
called amortization which reduces your debt over a fixed period of time. With
amortization your initial monthly payments are largely interest and as the loan
matures a greater portion of your payment is allocated toward the principal.
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