Your monthly mortgage payment is typically made up of four components: principal, interest, taxes and insurance together known as PITI. The principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. The interest is the fee charged for borrowing money.
Taxes refer to property taxes your community (town or city) charges which are generally based on a percentage of the value of your home. The lender collects 1/12th of the yearly property tax bill each month. The lender collects taxes in advance and places the money in an escrow fund.
Lenders won’t let you close on your home loan if you don’t have hazard insurance to cover your home and your personal property against losses from fire theft, bad weather and other causes. The insurance amount is collected and paid much like the taxes. Each month 1/12th of the insurance bill is collected and stored in an escrow account until the bill is due. Even if you pay cash for your home it is a good idea to buy hazard insurance in the event your home is damaged or destroyed.
Principal and interest comprise the bulk of your monthly payments. A process called amortization reduces your debt over a fixed period of time. With amortization your initial monthly payments are largely interest and as the loan matures a greater portion of your payment is allocated toward the principal.
