If you take out a loan to buy a home, then you’ll be making monthly mortgage payments until the amount you borrowed is fully repaid. Every monthly payment will be divvied up to cover different costs of homeownership: principal, interest, and escrow.
Here’s a mortgage payment breakdown of all the components that make up your monthly bill.
Mortgage Principal
Mortgage principal is the amount of money you borrowed for a home loan that you need to pay back to the lender. You’ll repay your principal in monthly installments over the life of the loan, which is typically 15 or 30 years.
When you start making monthly mortgage payments, most of your payment will go toward interest, and less will go toward principal. However, as time goes on, more of your payment will go toward chipping away at the principal balance, and less will go toward interest. This is known as mortgage amortization.
At the end of your loan term, you’ll have entirely repaid your mortgage principal.
Mortgage Interest
Interest is the cost of borrowing your mortgage principal, expressed as a percentage rate. Your interest rate will have a big impact on your monthly mortgage payment and how much you’ll pay overall. Saving just a fraction of a percentage point on your interest rate can save you thousands of dollars over time.
For example, if you buy a $500,000 home with 20% down at a 30-year fixed rate of 6%, your monthly payment would be $2,398.20 — excluding escrow costs. However, if your interest rate is 6.5%, then your monthly payment would increase to $2,528.27. That’s $130.07 more per month!
The interest rate you can score will be based on individual factors, such as:
- Your credit score.
- The loan amount.
- The loan term.
- The loan type.
- The interest rate type.
- The size of your down payment.
- The home’s location.
Your interest rate will also be influenced by market factors, including lending regulations and the state of the economy.
Escrow
Escrow is an account managed by a third party that helps make homeownership costs — like property taxes and homeowners insurance — easier to handle. Your lender will provide an escrow analysis, which estimates the annual cost of taxes and insurance and breaks it down into a monthly amount. That amount will become part of your monthly payment and be paid into an escrow account.
Here’s what is typically included in escrow.
Property taxes
Property taxes are charged by your local government to fund public services like schools and road maintenance. Though most local governments charge you for property taxes semiannually, many lenders require you to pay them in advance through your escrow account. How much you pay in property taxes will depend on where you live and the value of your home.
Here are the five states with the highest property tax rates in 2022, according to the National Association of Realtors:
- New Jersey: 1.79%.
- Illinois: 1.78%.
- Connecticut: 1.57%.
- Vermont: 1.43%.
- Nebraska: 1.36%.
In New Jersey, the annual cost of property taxes for an average single-family home in 2022 was $9,527.
Here are the five states with the lowest property tax rates in 2022:
- Hawaii: 0.3%.
- Alabama: 0.37%.
- Arizona: 0.39%.
- Colorado: 0.4%.
- Tennessee: 0.42%.
Homeowners insurance
Homeowners insurance covers losses and damages to your property or belongings in the event of an insured disaster — like a fire or theft. It also includes liability coverage for injuries or property damage caused by you, your family members, or your pets.
Most lenders require you to purchase homeowners insurance, which will become part of your monthly payment and typically be paid out of your escrow account. The cost of homeowners insurance can be found on Page 1 of your loan estimate and will vary depending on your provider. For example, a homeowners insurance policy with Progressive ranges from $83 to $138 per month.
Mortgage insurance
If you take out a conventional loan with a down payment that’s less than 20%, then you’ll need to purchase private mortgage insurance. One benefit of PMI is that it can help you qualify for a mortgage with a smaller down payment. However, it does add to the cost of your loan.
The most common way to pay for PMI is through a monthly premium that gets added to your monthly payment. You can find this amount on Page 1 of your loan estimate and closing disclosure.
Some government-backed loans — such as a U.S. Department of Agriculture loan or a Federal Housing Administration loan — require you to purchase mortgage insurance. You’ll pay for it as part of your monthly payment.
It’s important to note that PMI and mortgage insurance protect the lender — not you — if you can’t keep up with your monthly payments.
HOA fees
If you’re buying a house that belongs to a homeowners association, then you’ll need to pay HOA fees that help cover the cost of maintaining the community and providing shared services. HOA fees aren’t typically included in monthly mortgage payments, but in rare instances, your lender may be willing to add them to escrow upon request. While HOA fees can vary depending on where you live, they typically cost about $200 to $300 per month.
FAQ
Here are answers to some frequently asked questions about monthly mortgage payments.
Online mortgage calculators are a great tool to help you figure out what your monthly mortgage payment could look like. All you need to do is input the loan amount, loan term, interest rate, down payment amount, and zip code of the property.
If you have a fixed-rate mortgage, then your monthly payment will stay roughly the same over the life of your loan. However, there’s a chance it could fluctuate due to changes in the cost of homeowners insurance or property taxes.
Some lenders allow you to pay your homeowners insurance and property taxes yourself instead of through an escrow account. However, if your down payment is less than 20%, then you’ll likely be required to use an escrow account.
