Figuring out your monthly mortgage payment isn’t as easy as dividing the cost of your home by the number of months of your loan term.
There are four elements that make up your monthly payment. Remember this acronym: P.I.T.I.
P is for “principal,” which is the actual amount of money you borrowed from the lender. You’ll get this number if you take the amount of your loan and divide it by the number of months you took the loan out for.
I is for “interest,” which is the charge from the lender for taking out the loan. At the beginning of your loan, you’ll see that more of your monthly payment goes to interest rather than principal. The longer you pay down your loan, the more that balance shifts so that you are paying more on your principal than in interest.
T is for “taxes.” In most cases, the lender will take care of paying your real estate taxes for you. These are paid annually, so you’ll pay 1/12th of the payment each month, and the lender will keep this money in escrow for you until the taxes are due. The amount you pay in real estate taxes depends on the value of your home.
I is for “insurance.” The lender, in many cases, will also pay your homeowner’s insurance for you. Again, the yearly payment is broken into 12 smaller payments. If you own less than 20 percent of the equity in your home, you will have another kind of insurance to pay for: Private mortgage insurance (PMI), which protects your lender against default.
