What are the four parts of the mortgage payment? Knowing how your monthly mortgage payment breaks down can help you understand exactly what you’re paying and make it easier to create a budget.

In this post, Scott Coldwell and our realtors at Your Home Sold Guaranteed Realty - Coldwell Real Estate Services will cover the four parts of a mortgage payment.

Key Takeaways:

• The principal is the original loan amount you borrowed from the lender in order to purchase the home. Each month, you’ll pay a portion of this amount.
• Interest is the cost of borrowing money from the lender– or how the lender makes money from the loan. The amount you pay is determined by the interest rate you agreed to when you took out your loan. 
• Lenders typically collect property taxes and hold them in an escrow account until they’re due. This system is meant to protect the lender– it ensures your taxes are paid on time and reduces the risk of delinquency or foreclosure.

What Are the Four Parts of the Mortgage Payment?

Principal

The principal is the original loan amount you borrowed from the lender in order to purchase the home. Each month, you’ll pay a portion of this amount. As you pay off your principal, you’ll eventually start gaining equity in the home as you start owning more than you owe.

Interest

Interest is the cost of borrowing money from the lender– or how the lender makes money from the loan. The amount you pay is determined by the interest rate you agreed to when you took out your loan. 

Lenders don’t typically come up with the interest rate themselves. Instead, it’s largely determined by the Federal Reserve based on the supply and demand for loans. When you first start making mortgage payments, you’ll likely pay more towards interest than your principal balance.

Property Taxes

Lenders typically collect property taxes and hold them in an escrow account until they’re due. This system is meant to protect the lender– it ensures your taxes are paid on time and reduces the risk of delinquency or foreclosure. It also makes it easier on your budget by spreading out your taxes over monthly payments. 

It’s important to review your mortgage documents and escrow account details to understand how your lender is handling your property taxes and what your responsibilities are. It’s ultimately your responsibility to make sure they’re getting paid on time and in full. And once you finish paying off your mortgage, your lender will no longer be involved in paying property taxes.

Insurance

Similar to property taxes, lenders will set up an escrow account for your homeowners insurance. While homeowners insurance isn’t legally necessary, most lenders will require it as a condition of the mortgage to protect their investment in your home. By including your insurance payments in your monthly mortgage payment, you ensure your insurance premiums are paid on time.

In addition, if you have private mortgage insurance, a portion of your monthly mortgage payments will go towards paying it as well. It will be held in the same escrow account.

Buy Your Dream Home in Ocala, Florida, with Scott Coldwell

At Your Home Sold Guaranteed Realty - Coldwell Real Estate Services, Scott Coldwell and our team have worked with thousands of home buyers in Ocala and North Central Florida.

We know exactly what to do to guide our clients through the buying process and into their dream homes. Our experience is only one reason we’re ranked as the top realtor in Ocala. In addition, we offer unique buyer guarantees that make the buying process risk-free, like our Buy it Back Guarantee.

To learn more about working with Your Home Sold Guaranteed Realty - Coldwell Real Estate Services to buy a house in Ocala or the surrounding areas, call or text us at 352-290-3512.

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