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What makes up a mortgage payment?

When you send in your mortgage payment, you're not just paying back the loan. Let's take a look at what exactly goes into that bill.

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What makes up a mortgage payment.

Nowadays there’s one thing that almost all homes come with, a mortgage.

But what’s a lot less clear is what actually makes up a mortgage payment. What’s more, there’s usually some extra costs that go along with your mortgage.

Our video, Planning for Extra Costs When Buying a Home can help you figure out what these are.

But back to what makes up a mortgage payment. Well, you can basically break it down into four parts.

Principal, interest, taxes and insurance, or just simply, PITI.

See what I did there?

Let’s start with principal and interest.

The principal is the actual amount you end up borrowing from your lender. When you make a payment, this amount should go down.

Interest on the other hand, is the amount your lender is charging you to borrow that money.

In the beginning, most of your monthly payment will go toward paying that interest. But not to worry, because as time goes by and the more you pay toward your mortgage, the bigger dent you’ll be making where it really matters, your principal.

Next comes taxes and insurance.

Property taxes as you may already know are there to help fund government programs, like for instance, public schools and roads. But keep in mind, tax rates are different depending on the area and are based on the appraisal of a property, so it’s possible that you could pay more or less than the previous owner, depending on the home’s current value. Do your research ahead of time and make sure you’re prepared.

Lastly, there’s homeowner’s insurance. This may actually be the most important part of your mortgage payment because it’s put into place to protect you and your home against things like fire, theft or other types of damage that you have no control over.

Put it all together and you’ve got the makings for a mortgage.

And now that you know everything that actually goes into your payment, you’ll probably want to watch How Much Home Can You Comfortably Afford? to help you figure out how much is just right.

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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its partners assume no liability for any loss or damage resulting from one's reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management.

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