What is included in the mortgage payment ?

The monthly mortgage payment mainly pays off principal and interest.

Most home mortgage lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable) in an escrow account. You can choose not to have the insurance and taxes included in your mortgage payment, but then you have to make the lump sum payment once a year for insurance and real estate taxes.

Thanks to a nifty, insider acronym, courtesy of the mortgage industry, you can easily remember the four basic components of a mortgage loan: It’s PITI, and it stands for Principal, Interest, Taxes and Insurance.

Let’s break down the P and I in PITI first: Your monthly mortgage payment includes two parts, the principal and interest payment. The principal is the actual amount you borrowed from the lender. Every time you make a mortgage payment, your loan balance decreases, while your home equity (the portion of your home you own) increases.

The interest is the amount a lender charges you for borrowing the money to buy the home. Initially, the largest part of your mortgage payment is applied against the interest you owe. As your mortgage matures over time, more of your monthly payment goes toward paying off the principal. Your mortgage rate can change periodically if you have an adjustable-rate mortgage. It can also change if you renegotiate your mortgage or make a lump payment to lower the principal.

Property taxes and insurance

Taxes and insurance make up the “T” and the “I” in PITI. When you you have an escrow account with your lender, the lender collects a certain amount from your monthly payment and then passes pays the Tax and Insurance when they become due. Some lenders will allow you to pay your own property taxes and insurance. But you should keep in mind that real estate taxes and insurance will not be taken out and you must make a lump sump payment when they become due.

In case the lender considers you a risky client, you may also be required to have private mortgage insurance (PMI) in order to secure your mortgage. The PMI protects the lender from bankruptcy in case you can no longer make your payments. Once your equity amounts to 20 percent of the value of your home, you may be able to cancel the PMI.

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