Principal

Principal is the total amount you borrowed from the lender. A portion of each monthly mortgage payment you make goes towards the principal amount.

If you want to pay off your loan early, consider making extra payments to chip away at the principal balance. You’ll reduce the amount you owe and pay less interest.

Interest

Interest is the cost of borrowing money. How much you pay in interest each month is based on your interest rate and loan principal. Your interest payments go directly to your mortgage lender. As your loan matures, you’ll pay less interest because your principal balance is decreasing.

Taxes And Insurance

If your loan has an escrow account, it will collect your property taxes and homeowners insurance as part of your monthly mortgage payment. Your lender will keep the money for your taxes and insurance premiums in the escrow account and pay them when they’re due.

Mortgage Insurance

Most borrowers pay mortgage insurance if they make a down payment that’s less than 20%.

Conventional loans require private mortgage insurance (PMI). Federal Housing Administration (FHA) loans require a one-time upfront mortgage insurance premium (UFMIP) and monthly MIP payments, no matter how much you put down on a home. Department of Veterans Affairs (VA) loans have a funding fee borrowers can fold into their mortgage. U.S. Department of Agriculture (USDA) loans have an upfront and monthly guarantee fee.

PMI

Private Mortgage Insurance protects lenders when a borrower defaults on a conventional loan. Borrowers typically pay PMI when their down payment is less than 20%. Borrowers can usually request to remove PMI when they reach the 20% threshold through their mortgage payments and have a loan-to-value-ratio (LTV) of 80%. That 20% threshold means you have 20% equity in your home.

PMI typically costs 0.2% – 2% of your total loan amount. The premium can be added to your monthly mortgage payment, covered with a one-time upfront payment at closing or covered through a combination of these payment methods. There’s also lender-paid PMI. With this arrangement, a lender pays a borrower’s PMI in exchange for charging a higher interest rate on the mortgage.

MIP

With an FHA loan, you’ll pay an upfront mortgage insurance premium (MIP) no matter how much money you put down. You’ll pay monthly MIP for the first 11 years of the loan if you make at least a 10% down payment. If your down payment is less than 10%, you’ll pay monthly MIP for the life of the loan.