As homebuyers begin searching for a home, one of the most frequent questions they ask themselves early on is, “What can I afford?” Answering that question involves far more than just the price of a home. Beyond the amount borrowed and the term of the loan, the main components that determine your monthly mortgage payment are the principal, interest, taxes and insurance (PITI).
Principal & interest (P&I) + taxes (T) + insurance (I) = PITI
The principal is the repayment of your loan amount (the amount of money that is borrowed for a mortgage). The principal amount owed goes down when borrowers make regular payments, so long as it is not an interest only loan. This is the portion of the payment that is used to reduce the balance you owe. It may be obvious, but the larger the balance, the higher the mortgage payment.
Lenders charge interest on a mortgage as a cost of lending you money. Your mortgage interest rate determines the amount of interest you pay, along with the principal, or loan balance, for the term of your mortgage. Mortgage interest rates determine your monthly payments over the life of the loan. There is a direct correlation between the interest rate and the size of your payment—lower rates result in lower payments.
Whenever you obtain a mortgage, state, and local governments enforce a mortgage recording tax to document the loan transaction. This fee is separate from mortgage interest and other annual property taxes. Since it is state-imposed, the mortgage recording tax must be paid to the government when you register a mortgage.
This can include homeowner’s insurance (property insurance, plus flood insurance, and private mortgage insurance, if applicable). Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get. Only borrowers making a down payment of less than 20 percent of the purchase price of the home will need to pay for mortgage insurance. Your specific mortgage and the property you purchase could include other factors that affect what you owe each month. Ask your loan officer for more details on your monthly mortgage payment breakdown.