The Mortgage Payment

The mortgage payment is made up of:
  • ­Principal - This is the total amount of money you are borrowing from the lender (after you've made your down payment). It is the amount of money you are financing.

  • Interest - This is the money the lender charges you for the loan. It is a percentage of the total amount of money you are borrowing.

  • Taxes - Money to pay your property taxes is often put into an escrow account, meaning that the money is placed in the hands of a third party until it is time to pay or certain conditions are met. A portion of your property tax is added to your monthly mortgage payment and held in escrow until it is due.

  • Insurance - There are several types of insurance that can come into play when you get a mortgage. You'll have hazard insurance to protect against losses from fire, storms, theft, etc., and if your home is in a flood risk zone and you're getting a federally insured loan, you'll have to get flood insurance. Unless you have at least 20 percent equity in your home, you'll also have to pay private mortgage insurance (PMI). This can sometimes be pretty expensive, so it makes sense to put as much into your down payment as you can. (Equity is the portion of your home's value that you have already paid for.)
These pieces of your mortgage payment are referred to as PITI. There are also closing costs that you will have to pay. We talk about them in detail later in this article.

Mortgages are typically paid off in incremental payments that gradually chip away at the principal of the loan. This is called amortization. The portion of your payment that goes to pay the interest is much higher than the portion that goes to the principal -- at least for the first several years.


These payments are precisely calculated and scheduled to pay off the loan in a specified period of time. Try out this mortgage calculator to see an example of an amortization schedule and how it changes based on the term (time span) of the loan.

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