Components of a Mortgage Payment
Your monthly mortgage payment is made up of several components. This housing expense is commonly referred to as “PITI” or principal, interest, taxes, and insurance. PMI (see below) and homeowner’s association dues may also make up a portion of your total payment.
Principal – The original balance of money loaned, excluding interest - also, the remaining balance of a loan, excluding interest. The interest is calculated on the principal.
Interest – The charge for the use (loan) of money.
Taxes – The county assessor charges property tax based on the value of your home. Two tax installments are due each year. The first installment is due November 1 and is delinquent on December 10. The second installment is due February 1 and is delinquent on April 10. Taxes may be impounded, depending on the amount of your down payment. Anything less than 20 percent requires an impound account. An impound account is a trust account set up by the lender to which a portion of the monthly payment is credited so that funds will be available for the payment of taxes and insurance.
Hazard Insurance – This contract pays for loss on a home from certain hazards, including fire. You obtain homeowner’s insurance from your own insurance agent. The standard policy pays replacement costs, minus depreciation based on actual cash value. Talk to your insurance agent about the different types of insurance available. Hazard insurance may be impounded. Obtaining home insurance can present a large obstacle in today’s market. It is important to start looking for insurance immediately upon acceptance of your offer.
PMI – (Private Mortgage Insurance) – Depending on the amount of your down payment, you may be required to have PMI. A down payment of less than 20 percent requires PMI. Because loans with small down payments involve substantially more risk for the lender, they need protection in case the loan goes into foreclosure. Because this insurance is available, lenders can offer loans with lower down payments. PMI may require an up-front fee which is payable as a part of your closing costs and it is also required to be paid monthly with your payment.
FHA also charges a fee for mortgage insurance called MIP or Mortgage Insurance Premium. An upfront fee (which may be financed) and a monthly fee are assessed. VA charges a funding fee, which may also be financed.