Explain my Mortgage Payment

Let's demystify the mortgage payment. When you purchase a home your mortgage payment is made up of four figures referred to as PITI which stands for Principal, Interest, Taxes and Insurance.

When you obtain a mortgage it is usually amortized over 30 years. During the term of the loan more of your payment is applied to interest in the beginning of the term. You can ask your Realtor or Loan Broker for an amortization schedule which will detail exactly the amount of the principal and interest payment which is applied to principal and the amount applied to interest. The amount applied to interest will be tax deductible (be sure to check with an accountant on any questions regarding income tax). Here is an example:  Let's say you are buying a home for $120,000 and putting $20,000 down so your mortgage will be $100,000. At an interest rate of 4% fixed your monthly principal and interest payment will be $477.00. The first month's payment will be applied with $333.00 going towards interest and $144.00 going towards principal. The last payment will apply $2.00 to interest and $475.00 to principal.

The next item; taxes; is your property taxes. Usually the mortgage company will collect this amount every month even though property taxes are paid twice/year. When the taxes become due the mortgage company pays the taxes for you. Property taxes are paid on May 15 and October 15 each year.

The last item is your homeowner's insurance. You can shop around and find the best policy for your needs. This is another item, like property taxes, that your mortgage company will collect each month and then pay the insurance company directly.

The total of PITI is your monthly mortgage payment. Your lender will keep an escrow account and save the money for property taxes and insurance and pay the bills when they come due. Once a year the lender will review the escrow account, send you an accounting and sometimes will refund the excess amount.

If your down payment is less than 20% of the purchase price, the lender will require PMI (Private Mortgage Insurance). This will be added to your mortgage payment and usually amounts to approximately $90/month on a $100,000 loan.

Be sure to ask your lender to explain anything to you that you don't understand. Your Realtor can help also.