Your mortgage payment is really four bills in one. Knowing which is which makes it much easier to compare loans and plan ahead.
A mortgage is a loan secured by your home. If you stop paying, the lender can eventually foreclose, which is why the payment deserves a close look before you sign.
The four parts
Most payments bundle four things together, often shortened to PITI:
- Principal: the part that pays down what you borrowed.
- Interest: what the lender charges for the loan.
- Taxes: your property tax bill, split into monthly amounts.
- Insurance: homeowners insurance, plus mortgage insurance if your down payment was small.
Principal and interest are set by the loan. Taxes and insurance are set by your county and your insurer, and they change.
How the balance comes down
On a fixed-rate loan, the principal-and-interest amount stays the same every month, but the split shifts.
Example: borrow $300,000 for 30 years at 6.5%. The principal-and-interest payment is about $1,896. In month one, about $1,625 is interest and only $271 reduces the balance. By year 20, more than half of each payment goes to principal.
This pattern is called amortization. Ask your servicer for the full amortization schedule; it’s the clearest way to see how extra payments shorten the loan.
What escrow does
Many lenders collect taxes and insurance through an escrow account. Each month, part of your payment goes into the account, and the servicer pays the bills when they’re due. Once a year, the servicer reviews the account. If your property taxes or insurance premium went up, your monthly payment rises too, even though your rate didn’t change.
Worth knowing: a big escrow increase is often a sign your home’s assessed value or insurance cost jumped. It’s worth checking both, and appealing the tax assessment if it looks wrong.
Term changes everything
A 15-year loan has a higher monthly payment than a 30-year loan, but it usually comes with a lower rate and a fraction of the total interest. On the example above, a 15-year loan at a slightly lower rate would cost well over $100,000 less in interest, in exchange for a payment several hundred dollars higher each month.
Whether that trade is worth it depends on your budget and your other goals. The rate type matters too, as covered in fixed versus adjustable rates, and so does the program you borrow through, from conventional to FHA, VA and USDA loans.
The short version
- Most payments include principal, interest, property taxes and homeowners insurance (PITI).
- On a fixed-rate loan, early payments are mostly interest; later ones are mostly principal.
- Escrow changes can move your payment even when your rate is fixed.
Readers also ask
Can I make extra payments?
Usually, yes. Most modern mortgages allow extra principal payments without a penalty, but check your note for a prepayment clause.
Why is my first-year interest so high?
Interest is charged on the outstanding balance, which is largest at the start. As the balance falls, so does the interest portion.
Who can help if I fall behind?
Call your servicer early. HUD-approved housing counselors also give free advice on options.
This guide is general information about U.S. mortgages, not financial, tax or legal advice. Loan terms depend on the lender and on your credit, income and property, so confirm the details with your lender, and see consumerfinance.gov for official guidance.
