What Makes Up a Mortgage Payment?
Laura Adams, MBA
Carlos from El Paso asks:
I’m closing on a new home soon and my mortgage officer told me the monthly payment could change. This concerns me because I’m trying to create a future budget. Why could the payment go up for a fixed-rate loan?
There are several components of a mortgage payment, and some of them can increase or decrease.
They’re known as PITI, which stands for: principal, interest, taxes, and insurance.
- Principal is the loan amount that you borrow
- Interest is the price you pay to borrow the principal
- Taxes (known as property tax or millage tax) are paid to your local government based on the value of your property
- Insurance (known as homeowner’s insurance or hazard insurance) includes property and liability coverage
Additionally, your mortgage payment will typically include a monthly charge for Private Mortgage Insurance (PMI) if you make less than a 20% down payment. PMI is insurance for the lender that offsets their losses if you default on the loan.
With a fixed-rate loan, the total amount you pay for principal and interest each month never changes–that’s the fixed part.
However, your annual property taxes can increase or decrease over time if your home value appreciates or depreciates. Your annual homeowner’s insurance premium can also increase based on the construction cost to replace your home or on events in the overall insurance marketplace.
PMI can be eliminated once the balance on your mortgage is paid down to 80% of your home’s value.
To learn more about PMI be sure to read or listen to What is Private Mortgage Insurance (PMI) and How Can You Get Rid of It?
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Laura Adams is the award-winning author of Money Girl’s Smart Moves to Grow Rich. Get the paperback or ebook on Amazon.com!
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.