Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance. Making one payment to cover all four parts means you only have to remember one due date. More importantly, you are making progress on paying off your loan, protecting your home with insurance, and staying up to date on taxes, all at once.
Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance. If you’ve never owned a home before, you may be surprised that a mortgage payment has that many components. By including these costs in one monthly payment, your lender helps make things easier for you. Instead of separate bills and due dates for you to track, you have a system that helps you make sure these expenses are paid on time and in full.
Two of these components, property taxes and insurance, can be part of what’s called an escrow account. If you have an escrow account as part of your mortgage, part of your monthly payment funds that account, and then your lender pays your property taxes and homeowners insurance on your behalf when those bills are due. The benefit of this setup to you is that it can help you plan for those payments and make sure you have the money set aside for them so you don’t have to think about it.
If your mortgage does not include an escrow account, you will be responsible for making the full payments on your property taxes and homeowners insurance when those bills are due.
This short video explains all the pieces that can make up your monthly mortgage payment and how, over time, your payment helps you protect and become the owner of your home.
[your Home Matters<sup>SM</sup> Minute logo and Wells Fargo logo on screen]
[Video title text: The components of a mortgage payment]
[Graphic title says Components of a mortgage payment; large icon of a home is split into four levels; top level is labeled Principal; second level is labeled Interest; third level is labeled Taxes and bottom level is labeled Insurance; text below the graphic says For illustrative purposes only]
A mortgage payment is typically made up of four components: principal, interest, taxes, and insurance.
The principal portion is the amount that pays down your outstanding loan amount.
Interest is the cost of borrowing money. The amount of interest you pay is determined by your interest rate and your loan balance.
Taxes are the property assessments collected by your local government. Lenders typically collect a portion of these taxes in every mortgage payment and hold the funds in an account, called an escrow account, until they are due.
Insurance offers financial protection from risk. Like property taxes, homeowners insurance payments are typically held in an escrow account and then paid on your behalf to the insurance company.
[Icon of house breaks apart and animates off the screen, leaving only the bottom level visible with the label Insurance. That graphic is split in half horizontally, with the left side labeled Homeowners and the right side labeled Mortgage]
Two main types of insurance can be included as part of your mortgage payment. Homeowners insurance is required financial protection you must maintain in case your property is damaged by fire, wind, theft, or other hazards. Depending on your geographic location, you may be required to get additional flood insurance.
Mortgage insurance protects your lender in case you fail to repay your mortgage. Whether or not mortgage insurance is required usually depends on the size of your down payment and other circumstances.
[Graph animates on screen to show an example of the how your mortgage payment is split between Principal and Interest. Y-axis is labeled Monthly payments; X-axis is labeled Loan term (time) and as the graphic animates, the percentage of your payment that goes toward interest decreases while the percentage going toward principal increases]
In the early stages of your mortgage term, only a small portion of your monthly payment will go toward repaying your original principal.
As you continue to make payments through the years, a greater portion will go to reducing the principal.
[Bulleted list on screen:
Components of your mortgage
How they change over time
How they can affect equity]
When you understand the components of your mortgage, how they change over time, and how they can affect equity, you are in a better position to manage it.