When it comes to mortgages, there's a lot of confusing terminology and acronyms. It can be tough to keep track of it all, especially when you're focused on finding the best mortgage for your needs. But it's important to have a basic understanding of what is included your mortgage payment each month, so you can budget for it properly.
The Basics of a Mortgage Payment
Let's start with the basics. PITI is an acronym for the four main components of a mortgage payment: principal, interest, taxes and insurance. Together they make up what you pay on your mortgage every month. Understanding your potential PITI helps both you and the lender determine what you can afford when shopping for a home.
The principal is the amount of money you're borrowing from the lender. The interest rate is the premium you're paying for borrowing the money. Property taxes are determined and billed by local government agencies based on the value of the property. There are two types of insurance that could be included in your monthly payment. Homeowner’s insurance financially protects you from potential losses as a result of fire, theft, or other casualties.
Depending on the type of home loan you have, you might pay private mortgage insurance (PMI) or a mortgage insurance premium (MIP). Mortgage insurance doesn't apply to all loans. Some loans carry a higher risk for lenders, and they might require mortgage insurance to cover their investment if the loan goes into default.
How Your Interest Rate Affects Your Mortgage Payment
Your interest rate is an important factor when it comes to your mortgage payment. It influences how much you'll be paying each month, and it can make a significant difference in the overall cost of your loan.
How can you keep your interest rate as low as possible? Discuss options with your loan officer such as paying discount points to obtain a lower rate and refinancing when rates drop. It is important to seek advice from your loan officer to understand your options when it comes to the interest rate.
Your PITI mortgage payment is made up of a few different components that include principal, interest, taxes, and insurance. Here's a breakdown of what each of those mean:
The principal is the amount of money you borrowed from the bank. The interest is the amount of money the bank charges you for borrowing that money. The property taxes are what you pay to the local government. Homeowner’s insurance is what you pay to protect your home from damage.
It’s important to understand the mortgage payment when shopping for a home. Your mortgage lender can help guide you in understanding all of the components of your mortgage payment.
