Home guide
What's actually in a mortgage payment?
A mortgage payment is four separate bills collected as one, and sometimes a fifth. Here is what each part is, which ones move after closing, and the rule that decides when the fifth one stops.
When a lender quotes you a monthly payment, you are usually being quoted one of two different numbers, and nobody says which. Sometimes it is principal and interest only. Sometimes it is everything the servicer will actually collect. The gap between them is often four or five hundred dollars a month, which is enough to change what house you can buy.
The four parts
The payment people mean when they say "PITI" has four pieces:
- Principal — the part that reduces what you owe.
- Interest — the part that does not.
- Taxes — your property tax bill, divided by twelve and held for you.
- Insurance — your homeowners policy, collected the same way.
Only the first two go to the lender. Taxes and insurance go into an escrow account, which is a holding account in your name. The servicer collects a twelfth each month and pays the bills when they come due.
That is why your payment can change without your rate changing. A fixed-rate loan fixes principal and interest for thirty years. It fixes nothing about your county assessor or your insurer.
The fifth part, and the only one with a rule attached
If you put down less than 20%, there is usually private mortgage insurance on top. PMI protects the lender, not you, and you pay for it.
What makes PMI different from the rest of the payment is that federal law says when it has to stop. Under the Homeowners Protection Act, for a single-family principal residence with a loan that closed on or after 29 July 1999:
- You can request cancellation once the balance reaches 80% of the home's original value, if you are current and have a good payment history.
- The servicer must terminate it automatically at 78% of original value, provided you are current.
- Either way it ends the month after you reach the midpoint of the amortization schedule — year 15 of a 30-year loan — even if the balance has not come down that far.
The gap between 80% and 78% is worth knowing about, because it is yours to close. Take a $400,000 purchase with 10% down: a $360,000 loan at 90% LTV, which in the bands this site uses runs about 0.52% a year, or roughly $156 a month. On a 30-year loan at 6.5%, scheduled payments alone reach 80% of original value at month 95 and 78% at month 109. That is 14 months of PMI — about $2,184 — sitting between the date you could have asked and the date the servicer had to act.
You can see all five parts separately, and watch the PMI line stop, on the mortgage payment calculator.
What actually moves after closing
Three things change your payment over time, and none of them is your rate:
- Your tax assessment. Reassessments follow sales in your area, and a purchase is a sale.
- Your insurance premium. Renewal pricing has moved sharply in a lot of states.
- Escrow shortage. If the bills came in higher than the servicer projected, next year's payment collects both the new higher twelfth and a catch-up for the shortfall. This is the most common reason a payment jumps and the one people are least expecting.
What to ask
When you get a quote, ask three questions:
- Is this principal and interest, or the full payment? Then ask for the other one.
- What tax figure are you using? Many quotes use the seller's current assessment, which can be years stale and much lower than what you will be billed.
- What is the PMI rate and when does it come off? Get the original value in writing, since that is the number the 80% and 78% marks are measured against.
A payment you understand in parts is a payment you can check. A payment quoted as a single number is one you have to take on faith, and the pieces you cannot see are exactly the ones that move.
Sources: CFPB, when PMI can be removed, implementing the Homeowners Protection Act of 1998.