What Does a Mortgage Payment Consist Of?

More fun and exciting Q&A: “What does a mortgage payment consist of?”

Have you ever been curious what you’re paying each month to live in your shiny new (or possibly dingy old) home or condo?

A mortgage payment, assuming it’s not an interest-only loan, consists of a principal and interest portion, as well as mandatory taxes and insurance.
There’s a handy acronym to sum it all up, known as PITI; usually lenders want X number of months of PITI for cash reserves if you’re verifying assets when you apply for a loan.

The principal portion is essentially the amount of debt you are borrowing, which eventually transitions into your ownership in the home, or home equity.
The interest portion is the cost of borrowing the money for the loan, or the price the bank or mortgage lender charges for taking on the risk.

The tax portion of the mortgage payment is paid to the local government based on the assessed property value and tax rate for the area.

Finally, the insurance portion of the mortgage payment covers homeowners/hazard insurance, which protects the borrower from a number of dangers and provides liability coverage.

Note that if your loan-to-value exceeds 80 percent on a single loan, you’ll also have to pay private mortgage insurance.

FYI, an interest-only loan carries a mortgage payment that only pays off the monthly interest, taxes, and insurance, meaning you can only build equity in your home if the property value appreciates.

How the Mortgage is Paid Off...

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