Understanding Mortgage Payments: 4 Key Elements

Written By: Kelly Jaunet Jones

What Exactly is a Mortgage Payment, and How Does It Work?

Mortgage Payment = Principal + Interest + Property taxes + Homeowners' Insurance

Your Monthly Mortgage Payment has four parts known as PITI:

1. Principal: This is the amount you borrowed from the lender. Each payment reduces the principal balance.
2. Interest: This is the cost of borrowing the principal amount. The interest rate can vary based on your credit score and mortgage rates.
3. Taxes: Property taxes are assessed by your local government and can vary widely depending on where you live.
4. Insurance: This includes Homeowners insurance to protect your home and, if applicable, Private Mortgage Insurance (PMI) if your down payment was less than 20%.

How Does the Principal Amount Affect Your Overall Mortgage Payment?

During the pre-approval process, the higher the amount you borrow, the higher your payment will be. During the life of the loan, the more additional payments you make, the lower the principal will be. That could take years off your loan.

The Role of Interest in Your Monthly Mortgage Costs

Interest is a significant part of your monthly mortgage payment, especially in the early years of your loan. It calculates as a percentage of the remaining principal. Over time, as the principal decreases, the interest portion of your payment also decreases. Making extra payments can significantly reduce the total interest paid over the life of the loan.

Are Property Taxes Included in Mortgage Payments, and How Are They Calculated?

Property taxes are often included in your mortgage payment. You will pay 1/12 of your monthly yearly taxes into an escrow account. For example, let's say your yearly taxes are $1,200, and you pay $100 monthly as a part of your mortgage payment. The Lenders collect these payments and hold them in an escrow account until they are due. When your taxes come due, they are paid out of your escrow account on your behalf.

Homeowners Insurance works the same way. You will pay 1/12 of your monthly HOI premium into an escrow account. An example could be that your yearly HOI premium is $1,200, and you pay $100 monthly as a part of your mortgage payment. The Lenders collect these payments and hold them in an escrow account until they are due. When your HOI premium comes due, they are paid out of your escrow account on your behalf.

Additional Tips for Managing Your Mortgage

• Monitor Your Credit Score: A higher credit score can help you get better mortgage rates.
• Consider Extra Payments: Extra payments towards your principal can take years off your loan.
• Stay Informed About Mortgage Rates: Monitor current rates to determine when it might be a good time to refinance.
• Use a Mortgage Calculator: Mortgage calculators can help you understand how different factors affect your monthly payment.

Manage Your Mortgage with Leaders Credit Union

Take control of your homebuying journey by using this guide to understand each component of your mortgage payment and make informed decisions about your mortgage loan. Remember, an educated homebuyer is a confident homebuyer.

Leaders Credit Union wants to help you achieve confidence with your homebuying journey. If you want to know what kind of mortgage payment you can afford, contact our Mortgage Champions. Learn more about homeownership in our free Get Pre-Approved for Mortgage Guide.