Determining Your Mortgage Payment

PITI-full (But in a Positive Way).

Money is usually near the top of the list of concerns when it comes to buying a home. How much does it cost? How much is a down payment? How much will my monthly payment be? It’s completely natural to wonder those things, and when you decide to buy your new home, these are all topics of conversation to have with your lender.

For now, though, we wanted to give you some insight into how your monthly mortgage payment is determined. There’s actually a formula that lays out how a lender sets your payment, so let’s break it down.

PITI: Mortgage Payment Components

There are four factors that play a role in the calculation of a mortgage payment: Principal, Interest, Taxes, and Insurance (PITI).

  • Principal: A portion of each mortgage payment is dedicated to repayment of the principal balance. Loans are structured so the amount of principal returned to the borrower starts out low and increases with each mortgage payment. The payments in the first years of your loan are applied more to interest than principal, while in the final years, payments are applied more to the principal.
  • Interest: Interest is the cost for borrowing money from a lender. The interest rate on your mortgage affects the size of your monthly mortgage payment: Higher interest rates mean higher mortgage payments.
  • Taxes: Real estate or property taxes are calculated by the government annually based on the appraised value of your property. If your loan program allows for it, you may elect to make one lump sum payment every year. Otherwise, your taxes become part of your monthly payment and are into an escrow account. The amount due is divided by the total number of monthly mortgage payments in a given year.
  • Insurance: Like real-estate taxes, insurance payments are made with each mortgage payment and held in escrow until the bill is due. There are two types of insurance coverage that may be included in a mortgage payment. One is property insurance, which protects the home and its contents from fire, theft, and other disasters. The other is private mortgage insurance or ‘PMI’ (needed if the home is purchased with a down payment of less than 20% of the cost). This type of insurance protects the lender in the event the borrower is unable to repay the loan.

Monthly Payment Calculator

We know how important it is to educate potential borrowers and offer assistance in all stages of the home buying process. That’s why we’re making it as easy as possible for you to see what your potential monthly payment might look like. If you’re interested in crunching some numbers, check out our mortgage calculators.

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