Understanding Mortgage Payments: Principal, Interest & More

When you take out a mortgage, your monthly payment is typically made up of several components. Understanding these can help you make better decisions about your home loan.

The main component is P&I (Principal and Interest). The principal is the amount you borrowed, and the interest is the cost of borrowing. In the early years, most of your payment goes toward interest. Over time, more goes toward principal.

Most lenders also require you to escrow property taxes and homeowners insurance. These are collected monthly along with your P&I payment and held in an escrow account until they're due.

If your down payment is less than 20%, you'll likely need to pay PMI (Private Mortgage Insurance). This protects the lender if you default. PMI typically costs 0.5% to 1% of the loan amount annually.

Together, these four components are often referred to as PITI: Principal, Interest, Taxes, and Insurance. This is the total monthly housing payment you need to budget for.