Mortgage Payments Explained

The Five Parts of Your Mortgage Payment

Your monthly mortgage payment is more than just paying back what you borrowed. Here's the complete breakdown:

1. Principal

The principal is the original amount you borrowed to purchase your home. For example, if you buy a $400,000 home with an $80,000 down payment, your principal is $320,000.

Each month, part of your payment goes toward reducing this balance. Early in your loan, most of your payment goes to interest. Over time, more goes toward principal.

2. Interest

Interest is the cost of borrowing money from your lender. It's expressed as an annual percentage rate (APR). On a $320,000 loan at 6.5% interest, you'd pay about $1,733 in interest alone in the first month.

Interest is calculated based on your remaining principal balance. As you pay down principal, your interest charges decrease.

3. Property Taxes

Property taxes are assessed by your local government and fund services like schools, roads, and emergency services. These vary by location but typically range from 0.5% to 2.5% of your home's value annually.

Lenders usually require you to escrow your property taxes, meaning a portion of each payment goes into an escrow account to cover your tax bill when it's due.

4. Homeowner's Insurance

Insurance protects your home and belongings from damage or theft. Lenders require insurance to protect their investment. Annual premiums typically cost 0.35% to 1% of your home's value.

5. Private Mortgage Insurance (PMI)

PMI is required when your down payment is less than 20%. It protects the lender if you default on the loan. PMI typically costs 0.5% to 1% of your loan amount annually.

Once you reach 20% equity in your home, you can request to have PMI removed.

Example: $400,000 Home

With 20% down at 6.5% interest on a 30-year loan:

• Principal & Interest: $2,023
• Property Tax: $350 ($4,200/year)
• Insurance: $125 ($1,500/year)
• Total Monthly: $2,498