Mortgage - The Basics

A mortgage is a loan secured by real estate - in return for the funds necessary to purchase a home, a lender, gets you a promise to pay back the funds over a certain period at a certain cost. Backing your promise to repay is the property. Should you default, or stop paying, the lender would take over ownership of that property.

What do these monthly (mortgage) payments include?

Your monthly mortgage payment is made up of four parts: principal, interest, taxes and insurance (PITI), but it can also include expenses such as condominium homeowners’ association dues. The principal is the amount in your monthly payment that reduces the original amount borrowed. In addition, a monthly payment amount may be collected and held in a separate escrow account to cover property taxes, homeowner’s insurance and mortgage insurance. Your lender uses the money in the escrow account to pay your tax and insurance bills, as they come due.

Want to calculate your monthly payments? Visit our calculator page.

Principal + Interest + Taxes + Insurance = PITI or Monthly payment

Principal is the amount of money you borrow based on the sale price of the home. In the early stages of your mortgage term, your monthly payment includes only a small portion that repays your original principal. As you continue to make payments through the years, a greater portion of your payment goes to reduce the principal.

Interest is the cost of borrowing money. In the early stages of your mortgage term, your monthly payment is mostly interest. As you continue to make payments through the years, a smaller portion of your payment goes to interest.

Taxes are usually charged as a percentage of the assessed property value. Tax amounts vary depending on where you live.

Insurance offers financial protection in the event of a loss and has two main components that can be included as part of your payment. Homeowner’s or hazard insurance protects you against financial losses on your property as a result of fire, wind, natural disasters or other hazards. Most lenders will require you to have a homeowner’s insurance policy on your home because it will help protect their investment as well as yours. 

Other costs

Homeowners Insurance: Most lenders require the purchase of a homeowners insurance policy to protect your home against loss due to legal liability, fire, flood, or natural causes.

Maintenance: It takes time and money to keep a property in top condition. You’ll find that some sellers have kept their homes in great shape, and some in not-so-great shape. One way homebuyers protect themselves is with a home warranty. They cost a few hundred dollars a year, depending on the size of your mortgage and where you live, but they cover most of the major appliances and protect you from big expenses.

Homeowners Association Dues: Condominiums/town homes often have homeowners associations. The fees connected to these groups can range from a few dollars to several hundred dollars a month for upscale condos or neighborhoods with lots of amenities. As an owner, getting involved with the association can give you a voice in deciding how much those fees should be.

For more information see our pre-approval page on getting started!