Determining what a mortgage payment includes is often difficult, especially for new homeowners. Although lenders may collect payments differently, the composition of a typical mortgage payment is standard. For more background, see Understanding Home Loans and Mortgages.
Principal & Interest. The first part of the payment is commonly called P/I, which stands for principal and interest. Most loan calculators let you enter the loan amount, term and interest rate to find the P/I payment. Early payments mostly cover interest, while the final payments apply more toward principal.
Taxes. Property taxes are usually set by the county assessor and based on the value of the land and improvements. Lenders often collect taxes as part of the monthly mortgage payment and hold the funds in an escrow account. When taxes are due—commonly twice a year—the lender pays them on the borrower’s behalf.
Insurance. Homeowners insurance protects the property and is generally required by lenders. The insurance premium is usually collected through the lender’s escrow account and paid annually, with the cost divided into monthly portions added to the mortgage payment. Review your policy terms carefully so you understand coverage limits and exclusions.
Some mortgages also require mortgage insurance (M/I), which is different from homeowners insurance and depends on the down payment amount and loan program. Several first-time buyer programs require mortgage insurance. For more detail about mortgage-related insurance, see What is Life Insurance (Mortgage Insurance)?
If you have questions about how insurance or escrow are handled, be sure to ask an agent who can review your loan and coverage options.
Frequently Asked Questions
What does "escrow" mean on my mortgage statement?
Escrow is an account the lender uses to hold funds for property taxes and insurance so those bills can be paid when due.
Why does my mortgage payment change from year to year?
Changes in property taxes, insurance premiums or adjustments to mortgage insurance can increase or decrease the monthly escrow portion.
When does mortgage insurance end?
Mortgage insurance may end when you reach a certain loan-to-value ratio, refinance, or after a specific time set by the loan program; check your loan documents for details.