PITI: Understanding Your Mortgage Payment

Your monthly mortgage payment is typically composed of four elements: principal, interest, taxes, and insurance (PITI).

Principal - refers to the amount you borrow. When you pay principal on a loan, the money goes toward paying down the loan balance.

Interest - is the percentage rate the lender charges you for the privilege of borrowing money. The amount of your payment that goes to interest is calculated based on the remaining principal. This means that during the first few years of your loan term, more of your payment will go toward interest.

In addition to principal and interest, monthly mortgage payments will include money collected for property taxes and homeowner’s insurance.

Taxes - refers to property taxes. Lenders collect this money so that when the tax is due, the money will be available. Lenders want to make sure that the taxes are paid so that a tax lien is not placed on the property. Tax liens take precedence over all other liens, including mortgages, so unpaid taxes could result in the property being seized.

Insurance - is the homeowner’s insurance required by lenders. Lenders collect this money to ensure that continuous insurance coverage protects them against loss.

Lenders to collect these charges with your monthly loan payment, keeping this extra money in a separate escrow account. Escrow funds are then used to pay property tax and homeowner’s insurance bills on your behalf.

Every year your lender will conduct an analysis to make sure your escrow account is adequately funded to cover the taxes and insurance for the upcoming year. As part of this review, you'll receive an escrow analysis statement.