There are borrowers out there who go years paying their mortgage and are not even aware as to what their monthly mortgage payments consist of. Well the truth is there are really four main components that make are included in your mortgage payments. The four main components consist of principle, interest, taxes, and insurance (PITI). whether or not you pay this on the side, or its included in the mortgage payment, will depend on the type of mortgage loan you have acquired.
Below explained is the definition of pronciple, interest, taxes, and insurance:
Principle: Actual amount loaned to the borrower. This portion included in your monthly payments is dedicated to repaying the mortgage back and building equity in your home. Many loans will start out as interest only, and later in the upcoming years the mortgage will include principle payments as well.
Interest: Since the lender is taking a risk loaning the borrower a large sum of cash, interest must be added to the loan. This will have a direct impact on the amount of money you have to spend each month. If you have a high interest rate expect to have a high monthly payment as well. Also this will impact your overall total payment at the end of the loans term.
Taxes: There are two tax installments due by the borrower each year, usually on November 1st and february 1st. If the borrower did not come up with twenty percent down on their home they will have their mortgage taxes included in their monthly payments. This part of your mortgage payment does not go to your lender. It is actually given to the government and used for public services such as schooling, police department, fire department, road construction, etc. Tax rates may vary depending on the location of the property or the value of the home.
Insurance: Hazard or homeowners insurance is required to protect the homeowner from financial losses or damage to their property such as fire flood, wind, or other natural disasters. This will help the mortgage lender get paid if the borrower happens not to pay the loan in full. When you first bought your home, if you did not pay at least twenty percent as a down payment you may be required to purchase private mortgage insurance (PMI).
So basically principle, interest, taxes, and insurance are the main components of a mortgage loan. But some homeowners choose to not have taxes and insurance included in their monthly payments. These homeowners typically have a lower monthly payment, but they will still have to purchase these seperately on their own.
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