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Components of a mortgage payment

Your monthly mortgage payment has many parts: the loan principal, loan interest, taxes, homeowners insurance, and potentially mortgage insurance. If you’ve never owned a home, you may be surprised by how many costs make up a single monthly payment. By including these costs in one monthly payment, your lender is able to keep those payments organized. Let’s look at the details of each part: 

  • Loan principal: Principal is the amount of money you borrowed to buy your house. 
  • Loan interest: Interest is the amount you pay to borrow money from your lender. It usually is a percentage of the amount you borrowed. 
  • Property taxes: Your mortgage payment will typically include estimated annual real estate taxes, also known as property taxes.  
  • Mortgage insurance: If your down payment is less than 20%, you will likely have private mortgage insurance (PMI) included in your monthly payment. This is an added insurance policy that protects the lender if you are unable to pay your mortgage.
  • Homeowners insurance: Homeowners insurance protects you from things like disaster or theft. Your monthly mortgage payment will usually include your annual homeowners insurance premium. 

Where escrow comes in

Escrow usually includes property taxes, mortgage insurance, and homeowners insurance. If you have an escrow account as part of your mortgage, part of your monthly payment funds that account; then your lender pays these on your behalf when those bills are due. This setup can help you plan for these payments and ensure you have the money set aside for each.

However, if your mortgage does not include an escrow account, you will be responsible for making the full payments on your property taxes and homeowners insurance when those bills are due. 

Video: The components of a mortgage payment

This short video explains all the pieces that can make up your monthly mortgage payment and how, over time, your payment helps you protect and become the owner of your home.

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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Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A.

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