What am I Really Paying for in my Mortgage Payment?

There are typically 4 main components that make up your total monthly mortgage loan payment: Principal, Interest, Taxes, and Insurance.

The main part of the loan that everyone thinks about is the principal and interest. Your monthly principal is a fraction of the amount you borrowed from a lender to buy the home. The interest is the percentage (of the principal) that you pay over the life of the loan as a fee for the lender loaning you the principal.

The other part of your payment is the taxes and insurance. If you put less than 20% down on the property your taxes and homeowner’s insurance will likely be included in your loan payment. The mortgage company makes sure to collect an amount from you that will cover your yearly taxes and homeowner’s insurance. As they collect this money from you they put it into an escrow account until the bills are due and then make the payments for you. The lender feels like this is a little extra assurance that their investment stays insured, and property taxes are up to date.

There is also another type of insurance that could be included in your payment. Depending on your loan type and your down payment there is a chance that you will also pay a mortgage insurance premium (MIP) or private mortgage insurance (PMI). Typically, a conventional or FHA loan will require this if the borrower puts less than 20% down for the down payment. Since lower down payments can be riskier for investors, they can require mortgage insurance to help cover the loan in case it goes into default. Even if the borrower puts 0% down, VA loans do not require the borrower to pay mortgage insurance. Definitely a perk of a VA loan!