Why Does My Mortgage Payment Include Taxes and Interest?
You may have noticed that your monthly mortgage payment is more than the amount you originally expected to borrow. That is because your total mortgage payment can cover more than the loan itself.
Your monthly payment may include principal, interest, property taxes, homeowners insurance, and mortgage insurance, depending on your loan and how your payments are structured. Some of those costs go toward paying off your mortgage. Others cover the ongoing costs of owning your home.
What Is Included in a Monthly Mortgage Payment?
The four basic components of a mortgage payment are often referred to as PITI: principal, interest, taxes, and insurance. Mortgage insurance may also be included, depending on your loan.
Principal
Principal is the amount you borrowed to buy your home.
Each monthly payment typically puts a portion toward reducing your outstanding loan balance. As your principal balance decreases, you build equity in the home, assuming the home's value remains steady or increases.
Early in a typical mortgage, a larger share of your payment goes toward interest. Over time, more of your payment generally goes toward principal.
Interest
Interest is the cost of borrowing money.
Your mortgage interest rate determines how much interest you pay, along with your loan balance and loan term. With a fixed-rate mortgage, your principal-and-interest payment generally stays the same over the life of the loan, although your total monthly payment can change if your taxes or insurance costs change.
Property Taxes
Property taxes are assessed by your local government and help fund services such as schools, roads, and other public programs.
If your mortgage has an escrow account, a portion of your monthly payment is set aside for property taxes. When the bill comes due, your mortgage servicer typically pays it from that account.
Your property taxes can change over time, which means your total monthly mortgage payment can change, too.
Homeowners Insurance
Homeowners insurance helps protect your home and belongings against covered losses.
Like property taxes, your homeowners insurance premium may be collected through escrow. You pay a portion each month, and your servicer uses the funds to pay your insurance bill when it is due.
Insurance premiums can change, so it's possible for your mortgage payment to increase even when your interest rate has stayed exactly the same.
Mortgage Insurance
Mortgage insurance may be required depending on your loan type, down payment, or other loan characteristics.
For example, conventional borrowers may pay private mortgage insurance, commonly called PMI. FHA loans have mortgage insurance requirements that work differently.
If mortgage insurance applies to your loan, it can become another part of your total monthly payment.
What Is Escrow?
Escrow is one of the reasons your mortgage statement can look a little more complicated than expected.
An escrow account is used to collect money for certain homeownership expenses, most commonly property taxes and homeowners insurance. Instead of paying a large tax or insurance bill yourself when it comes due, you contribute toward those expenses throughout the year as part of your monthly mortgage payment.
Not every mortgage has an escrow account. If yours doesn't, you may pay your property taxes and homeowners insurance directly.
What Isn't Usually Included in Your Mortgage Payment?
Your mortgage payment doesn't necessarily cover every expense associated with owning a home.
Depending on your property and loan, you may also need to budget separately for:
- HOA or condo association dues
- Utilities, such as electricity, gas, water, and internet
- Home maintenance and repairs
- Homeowners insurance deductibles
- Certain supplemental insurance, such as flood insurance, depending on your situation
HOA fees, in particular, are generally separate from your mortgage payment, even though they are an important part of your overall monthly housing budget.
Why Did My Mortgage Payment Go Up?
A higher mortgage payment doesn't necessarily mean your mortgage interest rate changed.
If you have a fixed-rate mortgage, your principal-and-interest payment generally remains consistent. Your total payment can still increase if your property taxes or homeowners insurance premiums increase, because your escrow amount may need to be adjusted.
That's why it's helpful to look at your mortgage statement line by line. If your payment changed, your statement should help show whether the difference came from principal, interest, escrow, mortgage insurance, or another charge.
Your Total Monthly Housing Cost
When you're budgeting for a home, looking only at principal and interest can give you an incomplete picture.
Your total monthly housing cost may include:
Principal + Interest + Property Taxes + Homeowners Insurance + Mortgage Insurance + HOA/Other Property Costs
Not every homeowner will have every expense, and some costs may be paid separately rather than through the mortgage servicer.
When comparing mortgage options, look beyond the advertised principal-and-interest payment and consider the full cost of owning the home. Your Loan Estimate and Closing Disclosure provide important details about your projected monthly payment and the costs included in it.
About Luminate Bank
At Luminate Bank, we believe banking and mortgage lending should work together.
Luminate Bank is an FDIC-insured bank and full-service mortgage lender, giving you access to everyday banking and a broad range of home financing solutions under one roof. Our hybrid model combines the resources of a bank with the mortgage expertise to help you navigate major financial decisions with greater clarity.
Today we serve customers nationwide with more than 700 professionals, loan production locations across the country, and mortgage lending capabilities in all 50 states.
Whether you're buying your first home, moving into your next one, refinancing, investing in real estate, or simply trying to make sense of the mortgage you already have, our team is here to help you understand the numbers and the decisions behind them.
Frequently Asked Questions
Why does my mortgage payment include property taxes?
If you have an escrow account, your lender or mortgage servicer collects a portion of your estimated annual property taxes each month and uses those funds to pay your tax bill when it is due.
Does my mortgage payment include homeowners insurance?
It may. If your homeowners insurance is escrowed, a portion of your monthly payment is set aside for the premium. If you don't have an escrow account, you typically pay your insurance company directly.
Does my mortgage payment include interest?
Yes. For a typical mortgage, your monthly payment includes interest charged on the outstanding loan balance. It also includes a portion of principal that goes toward paying down the loan.
Can my mortgage payment change if I have a fixed interest rate?
Yes. A fixed interest rate generally keeps your principal-and-interest payment stable, but your total payment can change if property taxes, homeowners insurance, or other escrowed costs change.
What is the difference between principal and interest?
Principal is the amount you borrowed and are paying back. Interest is the cost of borrowing that money. Each mortgage payment typically includes both.
Are HOA fees included in my mortgage payment?
Usually not. HOA or condo association dues are generally paid separately, although they should still be included when calculating your total monthly housing expenses.
