Nearly all homeowners know exactly how much their mortgage payment will cost them each month. But when it comes to knowing just where all this money goes, it’s safe to say that not nearly as many borrowers are quite as keenly aware.
Possessing a solid understanding of their mortgage’s structure, though, can be beneficial for all homeowners. For one, it can be helpful when trying to determine how much longer you have left until your mortgage is fully paid off. It can also help you know, for example, how much impact making extra payments toward your principal could have on the total amount your mortgage will cost you over time.
The 4 parts of a mortgage payment
What is the breakdown of a mortgage payment? When you pay your mortgage each month, the money goes toward four components with an acronym of “PITI”: principal, interest, taxes and insurance.
Those looking to learn more can take a deeper dive into each of these four components and what they mean in the mortgage payment breakdown below:
- Principal — A portion of each mortgage payment goes toward paying back the remainder of the initial money borrowed (known as the “principal balance”) to the lender. Initially, due to the way that mortgage loans are structured, this amount is a small portion of the total monthly mortgage payment amount. But over time, it becomes a more substantial part of the payment total. (In the early years of the mortgage’s term, much more money goes toward paying off the interest on the loan than the principal — but the opposite becomes the case in the loan’s final years.)
- Interest — The interest is the money you pay to the lender as an incentive/fee for letting you borrow the money needed to buy your home. It’s typically expressed as a percentage of the principal borrowed, and the interest rate can be either fixed (staying the same for the life of the loan) or variable (changing over the life of the loan based on market conditions). For the lender, there’s a significant risk involved in making a mortgage loan, with the potential of the borrower defaulting being high among them. Further, providing the loan takes the money out of the lender’s hands for a substantial period of time. So, in return for taking the risk and parting with the capital, the lender gets to collect interest on the loan.
- Taxes — No matter where you purchase a home, you’ll pay property taxes that are based on the value of the property and the local tax rates. (Local government agencies assess the values of the properties in their jurisdictions regularly, so the amount you’ll pay in property taxes can go up or down from time to time based on your home’s assessed value.) The money collected in property taxes is used to pay for government-provided services such as schools, police forces and fire departments in the area. And while the property taxes are paid annually, most mortgage lenders collect a portion of the yearly taxes with the homeowner’s monthly mortgage payments, then hold these funds in an escrow account so that they’re available when the annual tax bills come due.
- Insurance — Funds for covering two types of insurance — homeowners insurance and mortgage insurance — are commonly included in mortgage payments. Homeowners insurance serves to protect the value and livability of the residence should a disaster or an accident strike.In either case, this type of insurance is designed to cover the repairs needed to return the property back to its pre-accident/disaster state in the wake of a damaging incident. Mortgage insurance is typically required for buyers who make a down payment of less than 20% on their homes and is designed to protect the lender should the borrower default on the loan. Insurance payments are also typically paid annually. But like the property taxes discussed just above, the funds for these payments are usually collected with the monthly mortgage payment and held in an escrow account until they’re needed.
Ready to get the application process started for your mortgage loan? Visit the Mortgages page on The Southern Bank’s website to use our online application process — which facilitates faster, easier and more convenient loan applications.
At The Southern Bank, we pride ourselves on offering friendly, personalized service to all of our customers — and that includes providing guidance when you have questions about any of our banking services. To learn more about our Personal Banking services ranging from Mortgages to Personal Checking, Personal Loans, Savings & Money Market, Certificates of Deposit (CDs) and more, check out the Personal Banking page on our website, or visit one of our local branches for friendly, in-person service with a smile.