If you have a fully amortized loan, your monthly mortgage payment includes at least two pieces: the portion going directly to principle (the money you've borrowed) and a second amount that goes toward interest (the cost of borrowing the money).
If you have an interest only loan, you pay only the interest and no portion goes to principle. However, homeowners typically have the option of paying down the principle on an interest only loan, or paying extra principle on a fully amortized loan.
For many homeowners there is a third part of the mortgage payment called the escrow or impound account. This is an account that your lender maintains for you to pay for things like homeowners insurance and property taxes. This is the element of the monthly payment that can go up or down even in a fixed-rate mortgage, based on your individual insurance or taxes going up or down.
Together, these elements are called PITI:
• P — Principal
• I — Interest
• T — Taxes
• I — Insurance
Homeowners must pay property taxes and they must have some type of homeowners insurance. Depending on state laws and other factors, most lenders require homeowners to pay into an escrow account. This account serves as a holding and keeps enough money to cover your property taxes and homeowners insurance for when they come due on an annual or bi-annual basis. You pay into this account each month as part of your mortgage payment. When your taxes and insurance come due, they are paid out of your escrow account, by your lender.
