Understanding Your Mortgage Payment: What You’re Really Paying For

Buying your first home is exciting, but when that first mortgage payment comes due, you might wonder: “Where is all my money actually going?” Unlike rent, which is usually a single fixed amount, a mortgage payment is made up of several parts. Let’s break it down so you know exactly what you're paying for each month.

The Four Main Parts of a Mortgage Payment: PITI

Most mortgage payments include these four key components, often referred to as PITI:

1. Principal – Paying Off the Loan

The principal is the portion of your payment that reduces the amount you originally borrowed. In the beginning, your payments will be mostly interest, but over time, more will go toward the principal.

Example: If you took out a $300,000 mortgage, the principal is the portion of that amount you’re paying off over time.

2. Interest – The Cost of Borrowing

Interest is what your lender charges for loaning you money. This is based on your interest rate and loan balance.

Example: If your interest rate is 6%, a portion of your monthly payment goes toward this cost before reducing your principal.

3. Taxes – Property Taxes

Homeowners must pay property taxes to their local government, which funds schools, emergency services, and infrastructure. Most lenders collect these taxes as part of your mortgage payment and hold them in an escrow account to ensure they’re paid on time.

Example: If your annual property taxes are $3,600, your lender may add $300 per month to your mortgage payment to cover them.

4. Insurance – Homeowners Insurance & Possibly PMI

Most lenders require homeowners insurance to protect against disasters like fire or storms. If you put down less than 20%, you may also have to pay private mortgage insurance (PMI), which protects the lender in case you default.

Example: If your homeowners insurance costs $1,200 per year, that’s an additional $100 per month in your mortgage payment.

How to Estimate Your Mortgage Payment

A general rule of thumb is to budget about 25-30% of your monthly income for housing costs. To estimate your payment, use this formula:

📌 Mortgage Payment = Principal + Interest + Taxes + Insurance

For example, on a $300,000 loan with a 6% interest rate over 30 years, your payment could look like this:

• Principal & Interest: ~$1,800

• Taxes: ~$300

• Insurance: ~$100

• PMI (if applicable): ~$100

💡 Estimated Total: $2,300/month

Have a great week, Homies!