PITI is the key abbreviation: That stands for Principal, Interest, Taxes and Insurance. Those four components make up most homeowners’ monthly mortgage bills.
Principal: This is the part of your payment that each month goes toward paying off the amount of money you owe on your mortgage. When you first start making mortgage payments, a fairly small percentage of your monthly payment goes toward your loan’s principal balance. As the years go on, though, a greater slice of your payment will go toward reducing your loan’s balance.
Interest: Early in the life of your loan, a hefty chunk of your monthly payment will go toward interest. The interest you pay on your loan depends on the size of your loan, the loan’s term and the interest rate attached to it. You’ll pay more in monthly interest on a 30-year fixed-rate loan of $200,000 with an interest rate of 6% than you would for a 15-year fixed-rate loan in the same amount with an interest rate of 4.5%.
Taxes: You’ll have to pay property taxes when you buy a home. Most lenders ask that you set up an escrow arrangement with them, meaning that you’ll pay a bit extra with each payment to help cover property taxes. When your taxes are due, your lender dips into this escrow fund to pay your tax bill on your behalf. If your yearly property taxes are, say, $6,000, expect your lender to add about $500 each month to your mortgage bill.
Insurance: Mortgage lenders won’t loan you money if you don’t first pay for homeowners insurance. Again, in an escrow arrangement—which many lenders require—you’ll pay extra each month to cover homeowners insurance. If your yearly insurance policy is $1,200, your lender will add about $100 to your monthly mortgage payment and then pay this bill for you when it comes due.