Calculating Mortgage Payment

paper with several figures with a pen and calculator When you borrow money to buy a home, you will have a monthly mortgage payment to make. But it may come as a surprise that your mortgage payment can actually be made up of four separate costs. Let’s take a look at what those are, right now.

It’s important to understand each of the individual components of your mortgage payment, also known as PITI: Principal. Interest. Taxes. Insurance. That way, you’ll be more informed about the total amount of money you’re spending on your monthly mortgage payment. And you’ll be better equipped to make decisions that help you cut the cost of homeownership and stay within your budget.

And here’s an important loan shopping tip: When you’re comparing mortgages from different lenders, make sure to compare apples to apples. The figures you’re looking at should be based on either PITI (all four components) or just principal and interest.

Here are the four costs that can make up your monthly mortgage payment.

Principal

The principal part of your mortgage payment is the amount you borrow from the lender. This is the sale price of the home minus your down payment. So, if you buy a $200,000 house and put down $10,000 (5 percent), the principal is $190,000.

When you first buy a house, more of your monthly mortgage payment is going to interest than to principal, because you’re paying interest on such a large amount.

Still, over time, as you continue to make your monthly mortgage payment, your principal loan balance will slowly drop. And your mortgage payment is structured so you pay off the entire principal balance over the repayment timeline (which is usually 15 or 30 years). If your loan type allows you to make extra principal payments outside of your monthly mortgage payment, you can accelerate this process and pay off your mortgage early.

Interest

The interest part of your mortgage payment is a percentage of your loan balance. You pay interest as a cost of borrowing money from a lender. It’s money that the bank gets to keep, and your interest payments do not reduce the principal balance you owe.

The higher your interest rate, and the more money you borrow, the more interest you’ll owe each month as part of your mortgage payment. As you start doing the math on what you can afford, don’t assume banks will give you the advertised interest rate. Yours could be higher, depending on several factors, including your credit score. A high score and a good overall credit history will earn you a better rate and help keep your mortgage payment down.

Taxes

two black silhouettes one man shaking money out of another mans pockets When you own a home, you typically have to pay property taxes to your local municipality.

These taxes are collected by your local government. Your lender will discover the yearly amount owed, divide that amount by 12, and fold in that amount into your monthly mortgage payment. When you send in your mortgage payment, the tax portion is put into your escrow account. An escrow account is a dedicated account the lender holds for you where it collects the tax portion of your monthly mortgage payment and keeps it until the property tax bill is due. Your property tax bill will be sent to your lender and paid from this account.

Insurance

Homeowners insurance works much the same way as taxes, and you may be required to pay for it monthly also as part of your mortgage payment. Although insurance is paid once per year, lenders will divide the amount due by 12 and collect a payment for it each month as a portion of your mortgage payment. This money is also put into an escrow account and used by your lender to pay your insurance bill when due.

Lenders will take these four components of your mortgage payment – principal, interest, taxes, and insurance – into account when determining if you can afford a mortgage. You should also consider all of them to see how your loan and monthly mortgage payment will fit into your budget and to ensure you’re making a smart financial choice when borrowing. To figure out how much you might owe in these categories, use a mortgage payment calculator to play around with the numbers – that way, you won’t get caught off guard when it’s time to make your monthly mortgage payment.