What your monthly mortgage payment actually covers

When you’re looking to buy a house, it’s important to make sure you understand how much your monthly mortgage payment will be and what’s included. Hint: it doesn’t all go to just your mortgage. 

Your monthly payment is broken down into four categories we call PITI:

P (Principal) - Your House: This is the money that goes directly toward paying down the cost of your home. This is what builds your equity each month. 

I (Interest) - Rental Fee for Loan: This is what you pay the bank for borrowing money from them. (Like forced gratuity, if you will.) 

T (Taxes) - Community Dues: These are your local property taxes. Your lender collects a little bit each month and holds it in a secure account on your behalf and distributes the funds when taxes are due (Oct 15th and May 15th). 

I (Insurance) - Safety Net: This covers your home owners insurance. Just like your taxes, this is tucked away into the same account on your behalf until the bill is due.

Wait - does this mean my monthly mortgage is actually four payments made out to four different people?

Nope! For most homeowners, you make one single monthly payment each month to your lender and they are the ones who handle divvying up the payments behind the scenes. 

This is why you have an escrow account with your lender - they put your taxes and insurance payments in the account each month and when payments for them are due, the lender pays them out of that account. 

When you’re chatting with a lender about how much you can afford - your lender isn’t just looking at the price tag of a house, they’re taking all four of these into consideration to ensure you purchase a home you can comfortably afford.

Have questions about monthly mortgage payments or finding a local lender you can trust? Let’s connect!