Complete Mortgage Payment Breakdown
Your total monthly mortgage payment, often called PITI, includes four components: Principal (loan repayment), Interest (cost of borrowing), Taxes (property tax), and Insurance (homeowners insurance). Many borrowers also pay PMI (private mortgage insurance) if their down payment was less than 20%. Understanding this breakdown helps you budget accurately for homeownership.
Property taxes vary widely by location, typically ranging from 0.5% to 2.5% of home value annually. These funds support local schools, infrastructure, and services. Your lender usually collects monthly property tax payments into an escrow account and pays the tax bill when due. This prevents a large annual bill and ensures taxes are paid on time.
Homeowners insurance protects your investment against damage from fire, storms, theft, and liability. Lenders require it because they have a financial stake in your property. Costs depend on home value, location, coverage level, and deductible. Shop around annually for better rates. PMI protects the lender if you default and typically costs 0.5-1% of loan amount annually. Request PMI removal once you reach 20% equity.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
An account where your lender holds funds to pay property taxes and insurance on your behalf. You pay 1/12 of annual costs monthly, and the lender pays bills when due, ensuring these obligations are met.
Request removal once you reach 20% equity through payments or home appreciation. Lenders must automatically cancel PMI at 22% equity. May require a new appraisal to prove current home value.
Principal and interest are fixed with a fixed-rate mortgage. However, property taxes and insurance can increase, raising your total payment. ARM loans have variable rates that change periodically.
Contact your lender immediately. Options include forbearance (temporary pause), loan modification (permanent changes to terms), or repayment plans. Avoiding the problem leads to foreclosure and credit damage.
Extra principal payments reduce total interest and shorten loan term. Ensure extra payments are applied to principal, not held in escrow. Prioritize this after building emergency savings and paying higher-interest debt.