Whether you choose to call it a “mortgage” or a “loan,” it requires repayment, typically once a month. But what, exactly, are you paying for, other than the amount you borrowed to buy your home in Wasilla?
Let’s dive into the anatomy of a mortgage payment.
The parts of your mortgage payment
When you write that check to your lender every month, it will be divided into four parts – to pay for the principal, interest, taxes and insurance, known as “P.I.T.I” for short.
The principal of your loan is the amount you borrowed. In the early years of a fixed-rate loan, little of your mortgage payment pays down the principal - it is most used to pay the interest. As the loan matures, however, the share devoted to paying the principal becomes larger.
The interest payment is the cost of getting the loan – the lender’s reward for taking a risk on loaning you money.
Property taxes can vary widely but to ensure that they are paid on time, your lender will collect your tax payments ahead of time and place them in escrow, to be paid out when taxes are due.
Homeowner insurance is a requirement when you take out a mortgage. Since the home is the loan’s security, it’s only natural that the lender wants to protect the asset from fire and other disasters, so insurance payments are part of your monthly loan payment.
You may also be required to pay for private mortgage insurance (PMI), which protects the lender should you default on the loan.
Some borrowers choose to pay taxes and insurance independently of their monthly mortgage payment, but whether you can do so depends on your lender.
Of course, these are the basic nuts and bolts of a mortgage payment. If you have questions, contact your lender.