If you’re planning to buy a home, you’ve probably already asked: What exactly is included in my monthly mortgage payment? Great question—and understanding the breakdown is essential for budgeting and planning.
Let’s walk through the key components that make up your monthly mortgage payment:
1. Principal
This is the portion of your payment that goes directly toward paying down the original loan amount. For example, if you took out a $400,000 mortgage and have already paid off $100,000, your remaining principal is $300,000. Over time, as you pay more toward the principal, you build equity in your home.
2. Interest
Interest is the cost of borrowing money from the bank. Unlike principal, this money doesn’t go toward owning your home—it’s the lender’s way of getting paid for loaning you the funds. The interest rate you lock in at the start of your mortgage determines how much you’ll pay over the life of the loan.
3. Property Taxes
Most homeowners are required to pay property taxes, which vary depending on your home’s location and assessed value. These taxes are often rolled into your monthly mortgage payment and held in an escrow account by your lender, who pays them on your behalf when due.
4. Homeowners Insurance
Just like your car, your home needs insurance. Homeowners insurance protects you from potential damages like fire, theft, or natural disasters. This is also typically included in your monthly payment and managed through your escrow account.
5. PMI (Private Mortgage Insurance)
If your down payment is less than 20%, you’ll likely need to pay PMI, which protects the lender in case you default on your loan. The cost of PMI varies but is generally added to your monthly mortgage payment until you’ve built enough equity to remove it.
💡 What’s an Escrow Account?
Most lenders will set up an escrow account for you. It’s like a mini savings account, built into your mortgage, that collects money each month to cover your taxes and insurance. This ensures you’re not hit with large bills once or twice a year—and gives your lender peace of mind that those essentials are being taken care of.
The Bottom Line
Your monthly mortgage payment includes more than just paying off your home. Between interest, taxes, insurance, and potential PMI, it’s important to understand the full picture. The good news? Your lender will help you break it all down and plan accordingly so there are no surprises.
📲 Have questions about what you can afford or how to get started with the homebuying process? I’m here to help. Let’s chat!
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