On a mortgage, what’s the difference between my principal and interest payment and my total monthly payment?
The principal and interest payment on a mortgage is the main component of your monthly mortgage payment. The principal is the amount you borrowed and have to pay back, and interest is what the lender charges for lending you the money.
For most borrowers, the total monthly payment you send to your mortgage company includes other things, such as homeowners insurance and taxes that may be held in an escrow account. You pay a set amount every month and your mortgage company typically holds the money in the escrow account until those insurance and tax bills are due, which could be once or twice a year. If your loan requires monthly mortgage insurance premiums, these will be included in your total monthly payment as well.
Here’s how it works:
Principal + interest + mortgage insurance (if applicable) + escrow (insurance and tax) = total monthly payment
If you live in a condo, co-op, or a neighborhood with a homeowners’ association, you will likely have additional fees that are usually paid separately.
Even with a fixed-rate mortgage, your total monthly payment can still change. Although your principal and interest payment remains the same as long as you have the loan (unless you have a balloon loan), your escrow payment can change. For example, if your home increases in value, your property taxes typically increase as well.
When considering a mortgage offer, make sure to look at the total monthly payment. Many homebuyers make the mistake of looking at just the principal and interest payment, leading to an unpleasant surprise when they learn their total monthly payment is much higher. You can find your estimated total monthly payment on page 1 of the Loan Estimate, in the “Projected Payments” section.
Many lenders require you to pay your taxes and insurance in advance using an escrow account, but not all do. If there’s no escrow payment listed on your Loan Estimate, these costs won’t be included in your monthly payment to your mortgage lender. Instead, you’ll have to pay property taxes directly to your state or local government and homeowners’ insurance directly to your insurance company. To make sure you can afford the mortgage, find out what your property tax and homeowners’ insurance bills will be, and calculate the total monthly payment yourself. Ask your real estate agent where to get this information.
When comparing mortgage offers, make sure you’re comparing apples to apples. If one lender requires you to pay taxes and insurance into an escrow account, but another doesn’t, compare the offers by looking at the principal and interest payment instead of the total monthly payment. Make sure to calculate the total monthly payment as well so you can be certain you can afford it.
You won’t receive a Loan Estimate if you applied for a mortgage prior to October 3, 2015, or if you're applying for a reverse mortgage. For those loans, you will receive two forms – a Good Faith Estimate (GFE) and an initial Truth-in-Lending disclosure – instead of a Loan Estimate. You can calculate your estimated total monthly payment by adding up the principal, interest, mortgage insurance premium (found on the fourth line in the “Summary of your Loan” section), and escrow payment (found in the “Escrow account information” section) on page one of the GFE. If you are applying for a HELOC, a manufactured housing loan that is not secured by real estate, or a loan through certain types of homebuyer assistance programs, you will not receive a GFE or a Loan Estimate, but you should receive a Truth-in-Lending disclosure.
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