When you make your monthly mortgage payment, it's important to know that it consists of more than just the principal and interest. Let's break down the key components of your PITI (Principal, Interest, Taxes, and Insurance) and other potential expenses that may be included:
- This is the portion of your payment that goes towards reducing the outstanding balance of your loan. As you pay down the principal, you build equity in your home.
- Interest is the cost of borrowing money, determined by your loan amount and interest rate. Initially, a larger portion of your payment goes towards interest.
- Property taxes are levied by local governments based on your property's assessed value. These taxes fund public services and infrastructure in your community.
- Homeowners insurance protects your property against damage or loss from covered events such as fire, theft, or storms. Lenders require insurance to protect their investment.
- Homeowners Association (HOA) Dues:
- If you live in a managed community, you may have HOA fees for shared amenities and maintenance.
- Mortgage Insurance (MI):
- If your down payment is less than 20%, you may need mortgage insurance (PMI or MIP) to protect the lender against default.
- Flood Insurance:
- Required in high-risk flood zones, flood insurance protects against flood-related damage.
- Special Assessments:
- Sometimes, local authorities or HOAs levy special assessments for community improvements.
