What’s Actually Included in Your Monthly Mortgage Payment?

What makes up your monthly mortgage payment?

Despite the name, your monthly mortgage payment doesn’t just pay your mortgage. Every month, your payment goes towards:

• Loan principal balance: This portion goes towards the amount you borrowed to buy your home.

• Loan interest: Your interest is what you pay to your lender for borrowing a home loan. It’s a percentage of the total amount borrowed.

• Mortgage insurance: If you have a down payment of less than 20%, your lender typically includes private mortgage insurance, or PMI.

• Homeowners insurance: Your home insurance is what you pay an insurance company to protect your home in case of theft or disaster. 

• Property tax: Set by your local government, this is a percentage of your home’s assessed value, multiplied by your local property tax rate. Homeowners pay this once or twice a year.

How to make monthly mortgage payments

If you take out a home loan, you’ll make monthly mortgage payments to your lender. Your lender sets up an escrow account, which takes your monthly payment and pays those property-related bills on your behalf. It’s your lender’s way of making sure those bills get paid without having you pay each one individually. 

Depending on the bill, your lender may make large payouts from your escrow account once or twice a year, but you’re not responsible for those lump-sum bills. Not all lenders require an escrow account. If you don't have a mortgage or an escrow account with your lender, you’re responsible for making those payments for homeowners' insurance and property taxes.

How your monthly mortgage payment changes

It’s normal to think that home payments will never change, especially if you lock in a fixed interest rate on your mortgage. But some instances cause your mortgage payment to fluctuate. 

How to lower your monthly mortgage payment

If your monthly mortgage payment is becoming increasingly difficult to make, there might be some options to reduce the financial strain, including:

• Refinance your mortgage. Refinancing is when you take out a new loan with a new interest rate and repayment terms. Your monthly payments could drop if you can secure a lower interest rate or longer terms. But refinancing comes with closing costs, ranging from 2% to 6% of the loan amount. Choose this option if you plan to save a significant amount on your monthly mortgage payment.

• Drop PMI. Contact your mortgage company to see if you qualify for PMI removal. You’ll need at least 20% equity in your home.

• Appeal your property tax assessment. If you feel like your property tax assessment was unfair or wrong, you can file an appeal with the property appraiser. You can also use Ownwell to lower your property taxes.

• Compare homeowners' insurance. Shop around for different homeowners' insurance with Insurify. Some states have more options than others, but you can see what’s available and if what you’re paying is the most affordable option. You can also contact your insurance company to see what discounts and deals you qualify for to help alleviate some of the costs.

The bottom line

Even though you make one mortgage payment per month, it gets distributed to a couple of different places. It’s important to know what makes up your payment and how it fluctuates. While you can’t change your loan principal balance, some things can change.

If you’re budgeting to buy a home, it’s essential to understand what makes up your total payment. If you own your home and are struggling to make payments, explore your options and talk to your mortgage lender about ways to lower your monthly payment.