What's in a mortgage payment?

Your monthly mortgage payment

Mortgage payments can generally be divided into four parts: principal, interest, taxes, and insurance. These are often referred to with the acronym PITI.

• Principal refers to the amount of money you borrow to buy a home, and to the outstanding loan balance at any point during the mortgage term.
• Interest is the cost of borrowing money. The amount of interest you pay each month is determined by your interest rate and the length of time you're borrowing the money.

The amount that you borrow is amortized over the length of the loan, generally 30 years, so that each month a certain percentage of your payment is paying back the principal and a certain percent is interest. In the early years, the amount of principal that you are paying back each month is very low and the bulk of the payment is interest. (The good news is -- you get to write that interest off on your income taxes!) As the years go by, the amount of principal grows with each payment. By the very last month of those 360 months, the last payment is the small final amount still due on the principal.

In addition, you can elect to pay an extra chunk of principal each month or any month. If you do that, make sure you mark it as "additional payment of principal" so it goes toward the principal and is not simply counted as your next payment. You can save a great deal of money over the years if you pay a little extra on the principal each month. To calculate how much, visit this site:

http://www.bankrate.com/finance/mortgages/early-payoff-mortgage-calculator.aspx

In addition to the principal and interest that you pay each month, the bank will collect the amount that you owe each year for property taxes and homeowners insurance. They divide this amount by 12 and collect 1/12th of the amount each month. Then when the bill comes due, they pay it for you. If you get a bill in the mail, it is probably just a copy for your records. If it looks as though you are being asked to pay it, contact your lender and make sure they are taking care of it. Again:

• Taxes assessed by your local government will be collected by your lender as part of your monthly payments, and then paid annually on your behalf. This process is known as an "escrow."
• Insurance, like property taxes, is also collected by the lender in an escrow account.

Obviously this additional amount that is added to your payment each month is going to vary according to the house you buy, how much the local taxes are, etc. But in the case of these houses on Plum Drive you can figure roughly an extra $150 each month for taxes ($100) and insurance ($50).


The most important thing to remember: When you are discussing your mortgage with your lender, make sure you know what they are talking about when they quote you a monthly figure. Is it just P and I, or is it PITI?