The Components of a Mortgage Payment

Besides The Actual Mortgage Payment, Which Also Factors Into The Monthly Payment On A Home?

While your mortgage payment is the largest component of your monthly home expenses, there are other items that factor into your payment as well. These include property taxes, homeowner’s insurance, and, if your lender requires it, private mortgage insurance (PMI).

Property Taxes

Besides the actual mortgage payment, property taxes also factor into the monthly payment on a home. The amount of tax is based on the value of the property and is collected by the local municipality where the property is located. The tax money is used to pay for various public services, such as schools, roads, and public safety.

State Taxes

State taxes are one of the components of a mortgage payment. In addition to the mortgage payment, state taxes, insurance, and escrow are also factored into the monthly payment on a home.

Federal Taxes

In the United States, homeowners are required to pay federal taxes on their property. The amount of tax that a homeowner pays is based on the value of their home and the tax rate that is set by the government. Homeowners who have a higher value home will pay more in taxes than those who have a lower value home. In addition to federal taxes, homeowners are also required to pay state and local taxes on their property. The amount of tax that a homeowner pays is based on the value of their home and the tax rate that is set by the state and local government. Homeowners who have a higher value home will pay more in taxes than those who have a lower value home.


Your mortgage payment is made up of four parts: interest, principal, taxes, and insurance. Insurance is usually homeowners insurance, which protects the lender’s investment in your home in case of fire or other disasters. The lender requires you to have insurance, and you pay the premium as part of your monthly mortgage payment. You can shop around for the best rate on homeowners insurance, just as you did for your mortgage.

Homeowner’s Insurance

Besides the mortgage payment, taxes and possibly condo fees, you will also have to pay for homeowner’s insurance. Your mortgage company will require you to buy a policy to insure your home against fire and other damage, to protect their investment as well as yours. The cost of this insurance is usually rolled into your monthly mortgage payment.

Mortgage Insurance

Mortgage insurance is one of the key components of a mortgage payment, besides the actual mortgage payment. Mortgage insurance protects the lender in case the borrower defaults on the loan. The monthly premium is based on the loan amount, term of the loan, and the borrower’s credit score.

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Private Mortgage Insurance

Private mortgage insurance, or PMI, is a type of insurance that protects lenders from loss if a borrower stops making mortgage payments. PMI is usually required if you have a conventional loan and make a down payment of less than 20%. It can be paid in one lump sum or as part of your monthly mortgage payment.


Interest is often one of the largest components of a monthly mortgage payment. Understanding how interest is calculated and how it factors into the monthly payment can help homeowners make informed decisions about their mortgage.

Fixed-Rate Mortgage

A fixed-rate mortgage is a mortgage loan that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate–and consequently monthly payment–remain the same throughout the life of the loan.

Adjustable-Rate Mortgage

An adjustable-rate mortgage, or ARM, is a home loan with an interest rate that can change over time. With an adjustable-rate mortgage, the interest rate won’t increase or decrease during the life of your loan, as it would with a fixed-rate mortgage. But once the initial period ends, your interest rate could rise or fall depending on current market conditions. That means your monthly payment could change too—and if you have an ARM with monthly payments that adjust upward, those increases could be substantial.

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Interest-Only Mortgage

An interest-only mortgage is a loan where, for a set term, the borrower pays only the interest on the principal amount they have borrowed. The interest-only term typically lasts for 10 years. At the end of the interest-only term, the loan converts to a principal-and-interest payment where the borrower will pay back both the principal and interest over 20 to 30 years.


When you get a mortgage to buy a home, you don’t just make one payment to the lender. Your monthly mortgage payment also includes money set aside for things like property taxes and insurance. This money is placed in an escrow account, which the lender uses to pay your property taxes and insurance bills on your behalf.

What is Escrow?

Escrow is an account held by a third party on behalf of the buyer and seller of something of value, most often a piece of property. The funds in the account are used to pay for expenses related to the sale, like real estate taxes and insurance premiums. Having an escrow account protects both the buyer and seller from default or non-payment.

Why do I Need an Escrow?

An escrow, or impound, account is set up by your lender to pay your property taxes and insurance premiums on your behalf. The funds are collected with each of your mortgage payments and held until the taxes and/or insurance bills come due. Holding the funds in escrow assures that these bills will be paid on time and helps protect you from any large, unforeseen increases in either taxes or insurance.

How Much Should I Have in my Escrow Account?

The escrow account is used to pay your property taxes and insurance premiums. Your mortgage company will hold the funds in escrow and pay the bills when they are due.Most mortgage companies recommend that you keep two or three months’ worth of payments in your escrow account to make sure there is enough money to cover the bills when they are due.

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