What Makes Up a Mortgage Payment?
When you’re buying a home, especially for the first time, the monthly mortgage payment can feel like a mystery. But once you understand what goes into it, you’ll be better prepared to budget confidently and avoid unexpected costs.
Your mortgage payment is typically made up of four components, often referred to as PITI:
- P – Principal
- I – Interest
- T – Taxes
- I – Insurance
Let’s break down each one.
1. Principal
Principal is the amount of money you borrowed to buy your home. Each monthly mortgage payment you make includes a portion that goes toward paying down this balance.
Example: If you took out a $300,000 mortgage, the principal is $300,000. In the early years of your loan, a smaller portion of your payment goes toward the principal, but that increases over time.
Paying down your principal builds equity in your home, which is one of the key benefits of homeownership.
2. Interest
Interest is what the lender charges you for borrowing the money. It’s calculated as a percentage of your loan amount and is based on your interest rate.
In the beginning of your loan term, a larger portion of your mortgage payment goes toward interest. As the loan matures, more of your payment goes toward the principal.
The interest rate you qualify for depends on factors like your credit score, loan type, down payment amount, and current market rates.
3. Taxes (Property Taxes)
Property taxes are assessed by your local government and are used to fund public services like schools, road maintenance, and emergency services.
Your lender typically collects 1/12 of your annual property tax bill each month and holds it in an escrow account. When taxes are due, the lender pays them on your behalf.
Property taxes vary depending on your home’s value and location. In Georgia, they are often calculated based on the assessed value of your home and the local millage rate.
4. Insurance
There are two types of insurance that may be included in your mortgage payment:
- Homeowner’s insurance: This protects your property from damage due to fire, storms, theft, or other covered events.
- Private mortgage insurance (PMI): If your down payment is less than 20%, you may be required to pay PMI, which protects the lender in case you default on the loan.
Like property taxes, your lender collects insurance payments each month and holds them in escrow until the bill is due.
Why Understanding PITI Matters
Knowing the four components of your mortgage payment helps you:
- Budget accurately for homeownership costs
- Compare loan offers from different lenders
- Understand what affects your payment over time
- Plan ahead for taxes and insurance renewals
Some buyers only focus on the principal and interest, but property taxes and insurance can significantly increase your monthly payment. That’s why it’s essential to understand the full picture.
Thinking about buying your first home?
I’m here to guide you through every step, from budgeting to closing day. Let’s connect to talk about your goals and find the home that fits both your lifestyle and your finances.
