Understanding Your Monthly Mortgage Payment
Buying a home is the largest financial decision most people will ever make. But your monthly payment is much more than just paying back the money you borrowed. Our Advanced Mortgage Calculator breaks down every component of your loan so you know exactly what to expect.
The Elements of PITI
A standard mortgage payment is comprised of four main parts, collectively known as PITI:
- Principal: The portion of your payment that goes toward paying down the actual loan balance. In the early years of a mortgage, this amount is very small.
- Interest: The cost charged by the lender for borrowing the money. For the first decade of a 30-year loan, the vast majority of your monthly payment goes directly toward interest.
- Taxes: Property taxes assessed by your local government. The lender usually collects this monthly and holds it in an escrow account.
- Insurance: Homeowner’s insurance, and potentially Private Mortgage Insurance (PMI) if your down payment was less than 20%.
Fixed vs. Adjustable Rate Mortgages (ARM)
A Fixed-Rate Mortgage means your interest rate never changes for the entire life of the loan (usually 15 or 30 years). Your principal and interest payments remain perfectly predictable. An Adjustable-Rate Mortgage (ARM) usually offers a lower introductory rate for the first 5 to 7 years, but then the rate adjusts annually based on market indexes, which can cause your monthly payments to spike drastically.