| Your monthly mortgage payment typically is made
up of four components: principal, interest, taxes and insurance,
together known as PITI. The principal refers to the part of the
monthly payment that reduces the remaining balance of the mortgage.
The interest is the fee charged for borrowing money. You can determine
the amount of principal and interest by using our Mortgage
Payment Calculator.
Taxes refer to property taxes your community levies which are generally based on a percentage of the value of your home. The lender usually collects 1/12th of the yearly property tax bill each month. The lender collects taxes in advance and places the money in an escrow fund. Lenders won't let you close on your home loan if you don't have hazard insurance to cover your home and your personal property against losses from fire, theft, bad weather and other causes. The insurance amount is collected and paid much like the taxes. Each month 1/12th of the insurance bill is collected and stored in an escrow account until the bill is due. Even if you pay cash for your home, it is a good idea to buy hazard insurance in the event your home is damaged or destroyed. Principal and interest comprise the bulk of your monthly payments
in a process called amortization, which reduces your debt over
a fixed period of time. With amortization, your initial monthly
payments are largely interest, and as the loan matures, a greater
portion of your payment is allocated toward the principal. |
