The Components of a Mortgage Loan

The four components of a mortgage loan are Principal, Interest, Taxes and Insurance – commonly referred to as PITI, or in some cases PITIA if there are association dues involved.

Principal - The principal is the amount of money you borrow, or your loan amount. Mortgage loans are set up so that you pay more interest than principal in the beginning, and more principal than interest as you get further into the payback. This is called "amortization". The portion of your payment that goes towards interest is based on the balance owed every month.

Interest – This portion of your payment is applied towards the interest accrued from the previous time period, usually approximately a month.

Taxes - Property taxes may be included with your mortgage payments, or paid quarterly. The amount of tax depends on where you live, and is usually assessed as a percentage of the property value. You may also have to pay local government taxes.

Insurance - Homeowners insurance protects you from financial losses on your property that might result because of fire, burglary, or other hazards. If purchasing a condo, hazard insurance may be included in your association dues but may not cover the interior of your unit. You may also consider purchasing a separate insurance plan to cover you for natural disasters such as an earthquake or flood, which is generally not covered by your hazard insurance.

Potential Mortgage Related Expenses

You may have to pay private mortgage insurance (PMI) premiums if you borrow more than 80% of the home’s worth. This type of insurance policy pays mortgage lenders for part of their financial loss if a loan is not repaid. You may drop this coverage when you have achieved 20% equity in the home unless the type of loan you use has a longer requirement.

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