Your monthly mortgage payment (PITI) includes four components: Principal (the amount that reduces your loan balance), Interest (the cost of borrowing), Taxes (property taxes held in escrow), and Insurance (homeowner's insurance held in escrow).
Some payments also include PMI/MIP (mortgage insurance) and HOA fees. PITI is the real number you should budget for.
Principal
Principal is the amount you borrowed from the lender. Each month, a portion of your payment goes toward reducing this balance. In the early years of a 30-year loan, very little of your payment goes to principal. Over time, more of your payment goes to principal as the loan balance decreases.
Interest
Interest is the cost of borrowing money. It is calculated based on your loan balance and interest rate. In the early years, most of your payment goes toward interest. This is why paying extra toward principal early in the loan saves so much in interest over time.
Taxes
Property taxes are collected by your lender and held in an escrow account. The lender pays your property taxes when they are due. This ensures the taxes are paid and protects the lender's investment. Your property taxes are based on the assessed value of your home and the local tax rate.
Insurance
Homeowner's insurance is also collected in escrow and paid by the lender. This covers damage to your home from fire, storms, theft, and other covered events. The cost depends on your home's value, location, and the coverage you choose.
PMI/MIP
If you put less than 20% down on a conventional loan, you will pay Private Mortgage Insurance (PMI). On an FHA loan, you pay Mortgage Insurance Premium (MIP). PMI typically costs 0.5-1% of the loan amount per year and can be removed once you reach 20% equity. MIP on FHA loans with less than 10% down lasts for the life of the loan.
HOA Fees
If your home is in a community with a homeowners association, you will pay monthly or annual HOA dues. These are not part of your mortgage payment unless your lender agrees to escrow them. HOA fees cover common area maintenance, amenities, and community insurance.
Example Payment Breakdown
On a $350,000 home with 20% down ($280,000 loan) at 6.5%:
Principal and Interest: $1,770
Property Taxes: $350 (estimated at 1.2% of home value)
Homeowner's Insurance: $100
Total PITI: $2,220/month
Add PMI (if applicable): $125
Add HOA (if applicable): $50
Total Payment: $2,395/month
