If you’re a first-time buyer, it’s easy to assume your mortgage payment is just your loan amount divided over time, but that’s not the whole story.
In reality, your monthly statement includes several components, from property taxes to insurance—and sometimes other costs. Understanding what goes into your payment can help you plan ahead, so here’s what you need to know.
Let’s Break it Down
While you pay a single amount every month, most lenders bundle several costs together that are commonly known as PITI, which stands for principal, interest, taxes and insurance. Here’s a breakdown of each of these items:
Principal: This is the amount of money you borrowed to buy your home. For example, if your home cost $400,000 and you put down $80,000, your principal loan amount would be $320,000. With each monthly payment, a portion goes toward gradually reducing that balance.
Interest: This is the amount your lender charges you each month to borrow money, calculated as a percentage of your remaining loan balance. At the start of your loan term, interest typically makes up the largest part of your payment. Over time, as you pay down your loan, the interest portion shrinks and more of your payment goes toward principal.
Taxes: Property taxes are set by your local government and are based on your home’s assessed value. Lenders usually collect this money from you each month and hold it in an escrow account (more on that below), then pay your taxes on your behalf when they’re due.
Insurance: Lenders require homeowners insurance to protect your property against damage or loss. Like taxes, insurance premiums are often collected monthly and paid from your escrow account. Some borrowers may also be required to carry additional types of insurance, such as flood insurance, depending on the location of the property.
Also, if your down payment was less than 20%, your lender may also require private mortgage insurance (PMI), which protects the lender in case you stop making payments. PMI is typically included as part of your monthly mortgage bill, and the cost can vary based on the size of your loan and your credit score.
How Escrow Works
Escrow is a separate account your lender uses to manage and pay key expenses like taxes and insurance. Most lenders require escrow accounts to ensure these bills are paid on time, which protects their financial interest in the property. When these bills are due, your lender pays them directly.
Each month, your mortgage statement will show the current balance of your escrow account. Because your taxes and insurance premiums can increase or decrease over time, your lender may adjust your monthly mortgage payment to make sure your escrow account has enough funds to cover future bills—even if you have a fixed-rate loan.
If your mortgage payment does change, however, your lender must notify you in advance. This is usually done through an annual escrow analysis statement, which shows your current escrow balance, upcoming tax and insurance payments, any shortage or surplus, and what your new monthly payment will be.
Why It Pays to Review Your Statement
Understanding what goes into your mortgage payment is important, but it’s also something you’ll want to keep an eye on regularly, because it can help you stay on top of your finances and avoid surprises.
Each statement includes a snapshot of how your payment is allocated—how much is going toward principal, interest, taxes, and insurance. It also shows your current loan balance, interest rate, and any changes to your escrow account.
If you have an adjustable-rate loan, it’s especially important to monitor your payment closely. Once the fixed-rate period ends, your statement will show any interest rate changes. By regularly checking your statement, you’ll be better prepared to adjust your budget if needed.
Have more questions about what goes into your mortgage statement? The local loan experts at Right By You Mortgage can help. Find a loan officer near you or send us an email at inquiries@rightbyyoumortgage.com to get started.
