Understanding Monthly Payments

There are four and sometimes five components of a typical monthly “mortgage” payment.

Principal

Is the amount of the monthly payment applied to reducing the amount owed on the loan.

Interest

The amount of the monthly payment applied to the actual cost of borrowing the money.

Taxes

With few exceptions a monthly payment includes 1/12 of the estimated annual taxes for owning the property.  Of course they don’t just collect this, they pay the borrower’s property taxes with it.

Insurance

With few exceptions a monthly payment includes 1/12 of the estimated annual premium for the homeowners insurance policy.  Once again, they don’t just collect it, they pay the borrower’s policy premium with it.

Insurance

Depending on the type of loan and amount of down-payment tendered, many loans include a mortgage insurance premium as a fifth component of the monthly payment.

Fixed Rate Loan Payments

A loan that has a fixed rate means the interest rate applied to the outstanding balance does not change over the life of the loan.  Therefore, the amount of the monthly payment collectively applied to the first two components, principal and interest,  does not change.  Property taxes and homeowners insurance premiums are subject to change yearly, therefore the amount collected in the monthly payment for these two components is subject to change annually over the life of the loan.  Lastly, some loans that include a mortgage insurance premium contain provisions for removing it when a prescribed threshold is reached.