What's in a Mortgage Payment?
Your total monthly payment may be divided among these four items.
As a homeowner, each month you’ll pay what feels like a punishing sum. Understanding the basic mechanics of the mortgage payment will help. Let's break it down:
- Principal. This is an actual bit of the price of the house, a tiny chunk of the humongous loan you’re asking for. When you first start paying on a mortgage loan, the amount of principal you pay off each month is tiny. That’s because the bank wants its money first, which brings us to ...
- Interest. What the bank charges you for loaning you the principal. Your first mortgage payments consist almost entirely of interest; the farther down the road you get, the more the payment skews toward the principal.
- Private mortgage insurance (PMI). With some shrewd tactics and a little luck, you may be able to avoid this payment; if you can’t wriggle out of it, it can cost you as much as $250 a month.
- Escrow. Most likely, you’ll pay an amount into this account every month that goes to pay your county property taxes, city property taxes and homeowners insurance. All these bills actually come due yearly, but you pay a little at a time to ease the pain, and the escrow company takes care of it for you.