What exactly is a mortgage payment?

You are probably familiar with the term ‘mortgage payment’, whether or not you have even purchased a home. While most understand the overall meaning of a mortgage, do you know what components are combined in order to determine a mortgage payment?

components of mortgage payment

In most cases your mortgage payment will include a combination of principal, interest, taxes and insurance -- also known as P.I.T.I.

Principal

The principal is the actual amount of money you borrow. This amount usually reflects the purchase price of the home minus any down payment that was made. This is the component of your monthly payment that goes towards paying back your loan.

components of mortgage payment

Interest

Interest is what you pay for borrowing money, strictly owed based upon using money that is not your own.

Often a lender will quote you an interest rate when you apply for a loan, locking in that rate for a certain amount of time. Make sure that your locked rate period is long enough to get you through closing, otherwise you will have to request an extension (which isn’t always possible). By locking in your rate, it ensures that you will not pay more if rates rise. Keep in mind when you are looking to lock in a rate for an extended period of time, if rates fall during this time you will still be paying your locked rate even if it is higher.

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Taxes

Property tax is based on the county that the home is located within. While considered an annual tax, you may be required to pay towards the total tax amount on a monthly basis. Typically these payments are held by the lender who then makes the payment when due on your behalf. This process ensures that taxes are paid correctly and on time, making sure the loan does not go into default.

Insurance

Insurance paid through your mortgage usually combines homeowners insurance and mortgage insurance (if necessary). Whether or not mortgage insurance is included will depend on your type of loan and how much money you put down on the down payment.

components of mortgage payment

Understanding a mortgage payment and what is involved is a very important aspect of the home buying process. It will be necessary for you to understand what you can afford and how this will affect your mortgage. If you need help calculating these numbers, the True Affordability Tool can help.

Want more homebuying advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all of your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a free Ready Report that is personalized based upon the information that you entered. This report will give you a vital head start in the home buying journey, saving you valuable time and money.

For more helpful tips and guidance about all things home, please join Nestiny by signing up below for free access to all our tools, games and money saving advice. So what are you waiting for? Get started on your journey today!

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Ready To Become A Smarter Homebuyer?

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Are you a real estate professional? Go here.