Principal + Interest + Taxes + Insurance = PITI
Principal is the amount of money you borrow based on the sale price of the home. In the early stages of your mortgage term, your monthly payment includes only a small portion that repays your original principal. As you continue to make payments through the years, a greater portion of your payment goes to reduce the principal.
Interest is the cost of borrowing money. In the early stages of your mortgage term, your monthly payment is mostly interest .As you continue to make payments through the years, a smaller portion of your payment goes to interest.
Taxes are paid by homeowners to local governments, and are usually charged as a percentage of the assessed property value. Tax amounts vary depending on where you live. Insurance offers financial protection in the event of a loss and has two main components that can be included as part of your payment.
Homeowner's or hazard insurance protects you against financial losses on your property as a result of fire, wind, natural disasters or other hazards. Most lenders will require you to have a homeowner's insurance policy on your home because it will help protect their investment as well as yours.
Mortgage insurance (MI) is required on certain loans to protect the lender against financial losses if the borrower fails to repay the loaloan. Usuallyenever the down payment is less than 20% of the home's purchase price, lenders require some type of insurance. Loans insured by FHA/HUD programs require a mortgage insurance premium (MIP), while VA loans require a funding fee. Conventional loans, or those without government backing, can be insured with Private Mortgage Insurance (PMI).
Typically, the portion of your monthly mortgage payment that covers taxes and insurance is held in a special account by your lenlender .Thenhen these bills are due, the lender forwards payment on your behalf to the local government or insurance comcompany. Thisocess is known as escrow. Using escrow for taxes and insurance is an option for the homeowner and not a reqrequirement. Onceur mortgage is paid in full, you are still responsible for taxes and hazard insurance.