Principal
This is the amount you borrowed for your mortgage loan. If you borrowed $100,000, then your outstanding principal is $100,000. A portion of each monthly mortgage payment goes toward paying off your outstanding principal. During the early years of your loan, the portion that goes toward your principal is small. But this portion grows with each payment and helps you build equity.
Interest
This is the amount your lender is charging you for the money you borrowed. During the early years of your loan, the portion that goes toward paying interest is large — but it is also tax deductible, meaning you’ll get a percentage of this money back. Plus, the portion of your mortgage payment that goes toward interest shrinks every month. Keep in mind, just because the portion that goes toward interest shrinks every month, doesn’t mean your total mortgage payment goes down. As the portion that goes toward interest shrinks, the portion that goes toward principal grows by the same amount.
Property Taxes
A portion of your monthly mortgage payment will be placed in an escrow account, which your lender will use to pay your property taxes on your behalf. Property taxes are also tax deductible, so you can look forward to getting a percentage of this money back.
Homeowners Insurance
A portion of your monthly mortgage payment will be placed in an escrow account, which your lender will use to pay your homeowners insurance premium on your behalf. Homeowners insurance protects against things such as storm damage, fire, theft and accidents that may occur on your property.
Private Mortgage Insurance (PMI)
If your down payment is 20% or more of the purchase price, the need for PMI is eliminated altogether. Until you have 20% equity in your home, though, a small portion of your mortgage payment will go toward paying for PMI, which protects your lender in case you default on your loan. Keep in mind there are a couple of ways for you to build equity. With each mortgage payment, the portion that goes toward principal builds your equity. Any increase in property value will also increase the equity you have in your home. Once you’ve achieved 20% equity in your home, ask your lender to eliminate PMI from your mortgage payment and you’ll save hundreds of dollars a year.