What four parts are typically included in a monthly mortgage payment?

A typical monthly mortgage payment is comprised of four main components: principal, interest, taxes, and insurance.

The principal represents the portion of the payment that goes toward reducing the loan balance. This is important because as the principal decreases, the homeowner builds more equity in the property, which is the value of ownership over time.

Interest is the cost of borrowing the money. It is calculated as a percentage of the remaining loan balance and is a significant part of the mortgage payment, particularly in the early years when the balance is higher.

Taxes are often included in monthly payments as they cover property taxes assessed by local governments. Lenders usually collect these taxes monthly and hold them in an escrow account, ensuring that they are paid on time, which helps avoid tax liens on the property.

Insurance involves homeowners insurance and, in some cases, mortgage insurance if the down payment is less than a certain percentage. This insurance protects the lender’s investment and can also shield homeowners from losses due to unforeseen events.

The inclusion of these four elements—principal, interest, taxes, and insurance—reflects the overall cost of homeownership beyond just the repayment of the loan, making it crucial for borrowers to understand these components when planning their monthly budgets.