What's Included in My Mortgage Payment?

What does PITI stand for?

PITI is short for Principal, Interest, Taxes, and Insurance. It is the common shorthand lenders use to describe the pieces that typically combine into one monthly mortgage payment. Understanding each piece can help you see where your money goes each month and why a payment can change even after your interest rate is set.

• Principal: the portion of your payment that reduces the amount you borrowed.
• Interest: the cost of borrowing, calculated on the remaining loan balance.
• Taxes: property taxes collected by the lender and paid to the county on your behalf.
• Insurance: homeowners insurance premiums, often collected the same way as taxes.

How does escrow work with taxes and insurance?

Many lenders require an escrow account, sometimes called an impound account, to collect a portion of your annual property taxes and homeowners insurance each month along with your principal and interest. When tax or insurance bills come due, the lender pays them from that account. This spreads a large annual or semi-annual bill into smaller monthly amounts, which many borrowers find easier to budget for.

Escrow accounts can be adjusted periodically. If your property taxes or insurance premium increase, your monthly payment may increase even though your principal and interest amount stays the same. This is one reason a mortgage payment is not always a fixed number over the life of the loan, even with a fixed interest rate.

When does mortgage insurance apply?

Depending on the loan program and the size of your down payment, your payment may also include mortgage insurance. Conventional loans with less than 20 percent down often require private mortgage insurance (PMI). FHA loans generally require a mortgage insurance premium regardless of down payment size, in most cases for the life of the loan or until refinanced. This coverage protects the lender, not the borrower, if the loan goes unpaid.

What about HOA dues?

If a property is part of a homeowners association, HOA dues are typically billed separately by the association rather than included in the mortgage payment itself. However, lenders factor HOA dues into your overall debt-to-income calculation when determining how much you can qualify to borrow, so it is important to budget for them even though they are paid outside your mortgage servicer.

Why might my payment change after closing?

Borrowers are sometimes surprised when a servicer notifies them of a payment change. This is usually not a change in the loan terms but an adjustment to the escrow portion because a tax bill or insurance premium came in higher or lower than estimated. Reviewing your annual escrow analysis statement can help you understand exactly what changed.

This article explains general mortgage payment structure and is not a quote for any specific loan. Actual payment amounts depend on your loan terms, property, and lender.