When you borrow from the bank for your home mortgage loan, you have to pay it back over time in regular monthly payments. But in a way, making your mortgage payment is like paying yourself because over time you are building equity and ultimately total ownership.
Let's look at how this works. There are four components to a mortgage payment. Principal, interest, taxes and insurance. Principal is the amount of the loan. You pay down principal over the term of your loan. Interest is the cost of borrowing money.
The amount of interest you pay is determined by your interest rate and your loan balance, and the term of the loan. Taxes are the property assessments collected by your local government. Homeowners insurance is required financial protection you must maintain in case your property is damaged by fire, wind, theft or other hazards.
Mortgage insurance could be required if you need to make a smaller down payment. This means you can borrow a larger percentage of your home's value and the insurance protects the lender if you're unable to make your mortgage payment.
It's always best to speak to your home mortgage consultant to know exactly what you need. In the early stages of your mortgage term, only a small portion of your monthly payment will go toward repaying your original principal. As you continue to make payments through the years, a greater portion will go to reducing the principal that you owe and reducing the interest, while taxes and insurance will still be required.
Understanding the components of your mortgage and how they change over time puts you in a better position to manage it throughout your loan. Your Wells Fargo Home Mortgage consultant can talk with you about how to understand your bill, how to pay your loan down faster, and how building equity can help you in the future. They are here for you no matter what your needs or questions. So enjoy home ownership as you pay your mortgage and yourself every month.
Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A.
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FAQs
Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance.
What are the 4 components of a mortgage payment? ›
There are four components to a mortgage payment. Principal, interest, taxes and insurance.
What are the 4 components of a monthly mortgage payment in the correct order as used in the acronym? ›
PITI, or principal, interest, taxes, and insurance, refers to all of the standard components of a mortgage payment.
What is the mortgage payment breakdown? ›
With a mortgage loan, you'll typically make just one monthly payment. However, that payment is often broken down into four components: principal, interest, taxes and insurance (PITI).
What is not included in a mortgage payment? ›
What's not included in your monthly mortgage payment? Utilities, homeowner's association fees, and condo association fees are not included in the mortgage payment that you pay to the lender. You're responsible for setting up your utility accounts and paying those separately.
What are the 4 C's in mortgage? ›
Meet the Fantastic Four - the 4 C's: Capacity, Credit, Collateral, and Capital. These titans hold the power to make or break your dream of homeownership. They're the guardians of mortgage approval, keeping a watchful eye on every aspect of your financial life.
What is all included in a mortgage payment? ›
There are four components to a mortgage payment. Principal, interest, taxes and insurance. Principal is the amount of the loan.
What is not one of the components of typical mortgage payments? ›
The component of typical mortgage payments that is NOT generally included is 4) Mortgage points. Mortgage points, also known as discount points, are upfront fees paid to reduce the interest rate on a loan. When making typical mortgage payments, the homeowner usually pays 1) Insurance, 2) Interest, and 3) Taxes.
What are the four parts of the mortgage payment also called Piti? ›
PITI (principal, interest, taxes and insurance) is what makes up your monthly mortgage payment. Your PITI number helps determine your housing budget. PITI stands for principal, interest, taxes and insurance. This is what makes up your monthly mortgage payment.
What of the following components make up the loan payment? ›
Loan Amount (Principal) Collateral. Down Payment. Interest & Fees.
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
What is the general rule for mortgage payments? ›
The 28%/36% rule is a heuristic used to calculate the amount of housing debt one should assume. According to this rule, a maximum of 28% of one's gross monthly income should be spent on housing expenses and no more than 36% on total debt service (including housing and other debt such as car loans and credit cards).
What is the formula for the monthly payment? ›
Monthly Payment = (P × r) ∕ n
Again, “P” represents your principal amount, and “r” is your APR. However, “n” in this equation is the number of payments you'll make over a year. Now for an example. Let's say you get an interest-only personal loan for $10,000 with an APR of 3.5% and a 60-month repayment term.
What four components usually make up a monthly mortgage payment? ›
PITI is an acronym for the four main components of a mortgage payment: principal, interest, taxes and insurance. Together, they make up what you pay on your mortgage every month.
Which three factors affect a mortgage payment? ›
Three Factors That Influence Your Mortgage Interest Rate
- Your Credit Score.
- Down Payment.
- Types of Interest Rates & Mortgage Programs.
Average Monthly Mortgage Payment: Highs And Lows By State
Keep in mind, these estimates are based on principal and interest only and do not include property taxes and insurance.
What are the 3 C's in mortgage? ›
The Three C's
After the above documents (and possibly a few others) are gathered, an underwriter gets down to business. They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.
What four factors affect the amount of a person's mortgage payment? ›
What 4 factors affect the amount of a person's mortgage payment? Your monthly payment will be based on the loan principal and your interest rate. If you have an escrow account, your monthly payment also will include property taxes and homeowners insurance.
What are the four steps of the mortgage process? ›
Mortgage Approval Process. The mortgage approval process consists of four phases which are often confusing to borrowers: Pre-Qualification, Pre-Approval, Conditional Approval, and Clear to Close.
