What is Included in a Mortgage Payment?

January 13, 2021 | 2 min read | The mortgage process
what is included in a mortgage payment

If you are thinking about buying a home or reviewing your current loan terms, you may be wondering what is included in your monthly mortgage payment. Your monthly payment will consist of the principal, interest, taxes, and insurance. 

Principal

The principal refers to the actual amount of money (the loan) you borrowed from the mortgage company. This amount does not include interest or fees. The principal balance will decrease every time you make payments. 

If you purchased a home for $100,000 and had a 20% down payment ($20,000), you would receive an $80,000 loan. Therefore, the mortgage principal is $80,000. As you continue to make monthly payments, the balance will slowly decrease. 

Interest

Interest is the rate at which the mortgage company is charging you to borrow the principal. Interest rates will vary depending on the borrower’s credit profile and loan terms. No matter if you have a fixed-rate or adjustable-rate mortgage, interest will accrue annually. 

To calculate how much interest you will pay each month, take the annual percentage rate, and divide it by twelve. Then, take that number and multiply it by your principal balance. For example, let’s say your rate is 3.000%, and you have a remaining loan balance of $75,000. That means that you will pay approximately $187.50 in interest that month (3%/12) x 75,000 = $187.50.

The amount of interest you pay will continue to decrease as the principal decreases. 

Taxes

Taxes vary depending on the appraised value of your home and the neighborhood’s property tax rate. Both of those factors continuously change over time, so it’s important to stay up to date with those numbers by reviewing your local tax policy and estimated home value. 

Insurance

The most common types of insurance are homeowner’s and private mortgage insurance (PMI). Homeowners with a current mortgage balance are required to have homeowner’s insurance coverage to protect the home from theft, fire, and other disasters. The cost of homeowner’s insurance will vary depending on your city and neighborhood. The insurance may be more expensive for those who live in disaster-prone regions or high crime areas. PMI is required if you have less than a 20% down payment and is required up until you have paid enough principal to own 20% of the equity in your home. 

Additionally, if you are a subprime borrower (have a low credit score), you must also carry supplemental mortgage insurance due to default risk.