The Components of Your House Payment

Think you’re paying just for your house? You may be surprised to know that your mortgage payment is not just a mortgage payment, but has other components wrapped up with it. Perhaps you’ve heard the term PITI, which stands for Principal, Interest, Taxes and Insurance. Let’s take a closer look at these payment “components”, as well as other things that you may be paying in your monthly mortgage check:

• Principal and interest payment (P&I) - This is the payment that’s necessary to amortize, or pay off, the loan amount (principal) and the interest over the specified term of the loan. This amount can be determined by using a mortgage amortization calculator.
• One-twelfth of the annual real estate taxes (T) - Real estate taxes are escrowed by just about all lenders because unpaid and past due taxes take a superior lien to any mortgage. If the owner does not pay them, the local government has the authority and power to sell the property in order to collect the delinquent taxes. For example, if the property owner owes $3,000 in taxes and $100,000 on the mortgage, the government is only concerned with the $3,000 tax debt. When the property is sold for taxes, and the buyer pays $3,000 for a $200,000 property, the taxes are paid and the lender has lost its security. Escrowing taxes is a safeguard against the possibility that the mortgage lien position could be jeopardized by nonpayment.
• One-twelfth of the annual homeowner’s insurance premium (I) - With homeowner’s insurance, the lender is only concerned that the dwelling itself (the security for the loan) is covered by the hazard portion of the insurance policy in the amount of the loan. (Some states now have laws that prohibit the lender from forcing the borrower to insure the dwelling for the loan amount if the value of the dwelling -- without the land -- is less than the loan amount.) However, having only enough coverage to pay off the mortgage addresses only the lender’s interest, not the homeowner’s. Coverage for other occurrences, such as theft and liability, should also be considered. Most insurance companies offer a full replacement-cost rider, which adjusts coverage to protect the full value of the dwelling.

  Most lenders require that the insurance policy be paid in full for the first year at the time the loan closes. The lender then escrows one-twelfth of that premium in the monthly payment. When the policy renewal date comes around for the next year, there will be enough money in escrow to pay it again for another full year. By doing this, the lender is protected against the possibility that the owner will forget to pay the premium.

• Private Mortgage Insurance escrow, if the loan is over 80% LTV (MI) - This insurance covers the lender against the possibility of default and foreclosure on properties with a loan-to-value ratio (LTV) of over 80%. If a borrower buys the property with a down payment of 20% or more, then PMI is not required.
• One-twelfth of any homeowner’s association- or maintenance fees, if any are charged (HOA) - For housing developments that have mandatory homeowner’s association fees or other types of assessment, the lender will not escrow for them, but the fees will be considered as part of the borrower’s housing expense. They will, therefore, be counted in the qualifying process because they are mandatory expenses.