Knowing the different parts of a mortgage payment can help you decide which type of mortgage is best for you.
Your monthly mortgage payment usually covers seven costs: the loan amount, the interest, the escrow account, taxes, homeowners insurance, mortgage insurance, and fees for the homeowners association or condo. Lets take a closer look at each. 1.
The amount you borrowed to buy your house is called the principal. It is also the amount of the loan that you have not yet paid back.
Keep in mind, the more money you pay up front in your down payment, the less you will have to borrow.
The amount of money you can borrow is based on a variety of factors, including your monthly income and payments such as car loans and student loans. Use our mortgage affordability calculator to estimate how much you may be able to qualify for. 2
Interest is the cost you pay to borrow money from your lender, and it usually appears as a percentage of the amount you borrowed.
Interest rates are set by your lender based on many factors, some that you can control and some that you cant. Out of those that you can control, one of the most important factors is your credit score. A higher credit score could help you get a lower interest rate.
Required by many lenders under the terms of your mortgage, an escrow account is a reserve set aside to pay for a portion of your annual costs for property taxes and insurance premiums, such as homeowners insurance.
Your escrow payment goes to your lender, who deposits the money into an escrow account. The lender uses the money in the escrow account to pay for your property taxes and insurance premiums on your behalf when they are due.
Regularly scheduled escrow payments are a good option for many homeowners because they eliminate the surprise of a large annual payment for those expenses.
Your mortgage payment will typically include one-twelfth of the estimated annual real estate taxes, also known as property taxes, on the home you purchased.
These payments are put into an escrow account, and the lender will use the funds to pay your property taxes on your behalf when they are due. 5
Homeowners insurance protects both you and your lender from fire or flood, which damages the structure of the house. It also protects from a liability, such as an injury to a visitor to your home, in addition to damage to your personal property, such as your furniture, clothes or appliances.
Your mortgage payment will usually include one-twelfth of your annual homeowners insurance premium that will be put into an escrow account.
Just like your taxes, when your insurance is due, your lender will use the money from that account to pay your homeowners insurance on your behalf. 6
If your down payment is less than 20%, you will have to purchase private mortgage insurance, an added insurance policy that protects the lender if you are unable to pay your mortgage.
As with your taxes and homeowners insurance, one-twelfth of your annual mortgage insurance premium is included in your monthly payment and put into your escrow account. Your lender will use these funds to pay for your insurance on your behalf when it is due. 7
Buying a home is an exciting milestone in life. But along with the joys of homeownership comes the responsibility of making monthly mortgage payments Unlike rent, mortgage payments have several components bundled together into one payment Understanding what these costs are is key to budgeting properly and managing your mortgage.
In this article, we’ll break down the three primary expenses that make up your monthly mortgage payment. Knowing what you’re paying for each month helps you make smart financial decisions as a homeowner.
Principal – The Base of Your Mortgage
The first component is principal, which refers to the amount you originally borrowed from the lender to purchase your home.
Principal is essentially the base of your mortgage loan. It’s the total purchase price minus whatever down payment you made upfront.
When you pay your mortgage every month, a portion of the payment goes toward paying off some of the original loan amount. In the early years, the principal portion is fairly small. But as the years go by, more and more of your payment goes toward the down payment.
You can build equity and own your home faster if you pay down the principal faster. There are a few ways to do this:
- Making extra principal payments
- Refinancing to a shorter loan term
- Making biweekly instead of monthly payments
Reducing principal should be a priority for most homeowners. The less you owe, the more equity you have in your property.
Interest – The Cost of Borrowing
The second component of your mortgage payment is interest. This represents the cost of borrowing money from the lender.
Interest is calculated as a percentage of your outstanding principal balance. The interest rate and loan amount determine how much interest you’ll pay each month.
The interest on your loan is likely to be the biggest part of your payment in the beginning. That’s because you owe the full amount you borrowed at the beginning.
As your balance decreases, less interest accumulates each month. By the end of your loan, you’ll pay very little interest since your remaining principal is so low.
When you get a fixed-rate mortgage, the interest rate stays the same for the whole loan term. But you can pay less in interest if you pay more on the principal or refinance when rates go down.
Taxes and Insurance – The Add-Ons
The third component of your mortgage payment covers property taxes and homeowners insurance. Most lenders require these to be paid as part of your monthly payment.
Property taxes are charged by your local government or municipality. The rate is based on your home’s assessed value and the jurisdiction’s tax laws.
Homeowners insurance protects your property and belongings from damage. It covers repairs in case of disasters like fires, floods, theft, and more.
Rather than paying these bills separately, your lender collects the money upfront in your mortgage payment. They place it into an escrow account and make the payments on your behalf when tax and insurance bills are due.
Escrow protects you from missed payments and penalties. It also guarantees your insurance and taxes are paid on time.
The Mortgage Payment Breakdown
Now let’s look at a sample mortgage payment breakdown:
- Principal – $300
- Interest – $800
- Taxes – $200
- Insurance – $100
- Total Payment – $1,400
As you can see, interest tends to be the biggest chunk, especially early in the loan. But principal increases over time as your balance decreases.
Understanding this breakdown helps you budget and make smart financial decisions as a homeowner. You can shift payments towards principal if you want to pay off your mortgage faster. Or you may look into refinancing if interest seems too high.
Options for Paying Your Mortgage
You have choices when it comes to making your monthly mortgage payment:
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Monthly payments – This is the standard repayment schedule where you pay once per month.
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Biweekly payments – You pay half your monthly amount every two weeks. This adds up to one extra payment per year, helping you pay off your mortgage faster.
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Weekly payments – Paying weekly speeds up your payoff even more by dividing your monthly payment into four.
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Extra principal payments – You can pay extra to be applied directly to your principal balance. This reduces the amount that accrues interest.
Discuss options with your lender to pick the right payment method for your financial situation. Automating payments ensures you never miss a payment too.
Homeownership Costs Beyond Your Mortgage
While principal, interest, taxes, and insurance make up your basic mortgage payment, owning a home has other costs too:
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Home maintenance – From leaky roofs to broken appliances, expect repair and upkeep expenses as a homeowner. Budget 1-4% of your home’s value annually.
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Home improvements – Remodeling, renovations, and upgrades add value but can get pricey. Prioritize projects wisely.
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Utilities – You’ll now pay for electricity, gas, water, trash pickup and more. Shop plans and providers to save.
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HOA fees – If part of a homeowners association, regular dues pay for shared amenities and community upkeep.
As you can see, mortgage principal and interest are just the start. Budgeting for all the costs of homeownership is key to avoiding financial stress.
The Takeaway – Know Your Mortgage Payment
Buying a home is a big commitment. Your mortgage payment seems simple on the surface, but contains multiple components.
Knowing the breakdown of principal, interest, taxes, and insurance (PITI) helps you understand the true costs of homeownership. This allows you to make smart financial decisions and pay off your mortgage strategically.
While budgeting for a monthly mortgage payment is essential, don’t forget about additional homeowner expenses too. With proper planning, you can cover all the costs confidently and enjoy being a homeowner.
Homeowners Association Fees or Condominium Fees
Most neighborhoods and all condominiums have a homeowners association (HOA). HOAs provide services such as maintaining common areas, managing trash and snow removal, and help enforce rules set by the neighborhood or condominium developer.
To cover these costs, you need to pay a regular fee to your HOA.
Gain a better understanding of the different types of mortgages, and other expenses you will encounter as a homeowner.
Last reviewed: January 03, 2025
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FAQ
What are the 3 parts of a mortgage?
Components of a mortgage paymentLoan principal: Principal is the amount of money you borrowed to buy your house. Loan interest: Interest is the amount you pay to borrow money from your lender. Property taxes: Your mortgage payment will typically include estimated annual real estate taxes, also known as property taxes.
What are at least three of the costs that make up a mortgage payment writer?
The cost of **borrowing **money is called interest. Your interest rate and loan balance determine the **amount **of interest you pay. Thus, three of the **costs **that make up a **mortgage **payment are principal, interest, taxes, and insurance.
What three costs contribute to the total cost of mortgage?
Your monthly mortgage payment will depend on your home price, down payment, loan term, property taxes, homeowners insurance, and interest rate on the loan …3 days ago.
How much is a $300,000 mortgage payment for 30 years?
How Much is a Monthly Payment on a $300,000 Mortgage? Expect to pay about $1,798 to $2,201 per month for a $300,000 mortgage with a 30-year loan term, depending on your interest rate and other factors. Learn more about the upfront and long-term costs of a home loan.