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Payment Components

A mortgage payment typically consists of many components. The main one is the loan itself, which is divided into principal (the amount you borrowed initially) and interest (the amount your lender charges for allowing you to borrow their money).

For most loans, in the early years of your mortgage almost all of your payment goes to the bank as interest with very little reducing your loan amount. In the later years, almost all of your payment goes to reduce your loan and only a small portion goes towards interest. This is called "amortization". You can ask your lender for an amortization table that shows for each payment how much of it goes toward interest and how much toward principal.

Part of your mortgage payment may consist of money that your lender collects on your behalf for property taxes, homeowners insurance, and/or mortgage insurance. This money is placed in an escrow account, and your lender pays the bills when they are due. Together, the principal, interest, tax, and insurance payments are referred to as "PITI".

Next Topic Payment Components: Escrow